Headlines like 'Investors lose Rs 3,000 crore on Black Monday' or 'Investor wealth rises by Rs 25,000 crores' can make a layman wonder whether the stock market is a place to make money or lose money. Due to this many people either invest when the markets are going up or don't invest in the markets at all, instead opting for the security of bank fixed deposits.
This is a big mistake as the stocks are the best means of building wealth over a long-term while helping you beat inflation.
However over the short-term, markets tend to be very volatile. Market volatility means while the market can rise sharply, it can also go down dramatically. As a result, those who have invested their money will see the value of their investment sway sharply.
Particularly new investors are affected during the market crash, when they see their investments being wiped out. Hence, it is important for every smart investor to tackle market volatility intelligently.
Opt for balanced funds: With the stock markets reaching dizzying heights, investors started choosing pure equity funds over balanced funds. Balanced funds are great for dealing with the market volatility as they give the investors exposure to both equities and debt in the ratio of 65:35 (65% in equities and 35% in debt).
As these funds don't concentrate solely on the equities, they do not fall as sharply as good old equity funds. Alternatively, you can opt for monthly income plans, which are less risky than balanced funds, since they invest just 15%-25% of their assets in equities.
Sunil invested Rs 10,000 in a pure equity fund. His wife Smita invested Rs 10,000 in a balanced fund. Despite Sunil insisting that Smita opt for an equity fund, Smita refused. So when market crash came, the value of Sunil's investment became Rs 3,000, while Smita's investment became Rs 6,000.
Invest in market through SIPs: A Systematic Investment Plan (SIP) is the most powerful way to benefit from the market volatility. It allows you to average the cost of your purchase, by letting you buy fewer units of the mutual fund when the markets are high and more units during the market downturn. As a result, your average cost of purchase goes down.
Anita started a SIP of Rs 1,000 in a mutual fund with a NAV of Rs 10. She received 100 units with her first installment. The next month the NAV of the fund went to Rs 20 and she received 50 units. In the third month, the market nosedived and the NAV became Rs 5, giving her 200 units. So by making an investment of Rs. 3000, Anita got 350 units. Her purchase price per unit was Rs. 8.57 units.
Diversify your portfolio: We all love it when a particular asset is doing well. This has been evident in the recent stock market crash where people put all their money in realty and infrastructure sectors, which were badly affected. Since many people had taken massive exposure to these sectors, the market crash ended burning many people's fingers. So as a smart investor, ensure adequate exposure to various asset classes. Though make equities the mainstay of your investment plan, ensure you take exposure to other assets like gold, realty and debt. So in case of a stock market downturn you are sufficiently protected.
John wanted to become rich. He was lured by the stories of people making a quick buck in the stock market. He contacted his broker who recommended him to invest in stocks of Unitech, DLF and other leading realty companies. John followed his advice and invested accordingly. But the market downturn in 2008, saw John losing the value of his investment as all these companies were severely affected.
Moral of the story: don't put all your eggs in one basket.
The primary nature of the stock market is its high volatility. Those who try to predict its course always end up going wrong. So as a smart investor, you should try to handle market volatility. This can be done by investing in bits and pieces, diversifying your assets and trying to book profits at regular interval. This will protect your money when the going gets tough.