India VIX indicates calm in stock market. Time to book profit or invest more?
The India VIX is at a low level at this juncture, there is a high probability that the volatility index may revert to its mean range which is the 15-20 range.
PremiumThe domestic volatility index- India VIX - is at historically low levels, teasing investors to up their investing game as the market sentiment is stable. In the calendar year so far, the volatility index India VIX has fallen nearly 12 per cent. At present, it is hovering near the 13 level which is a significantly low level. Past data show, the India VIX generally sits in the 15-20 range.
While a stable market has low risks of capital erosion, some analysts believe that investors should consider taking some profits off the table at this time as a stable market offers very few opportunities to enter into it while during volatile times, investors tend to get many opportunities to pick stocks.
The India VIX is a measure of how much the Nifty 50 index is expected to change in the next 30 days. If the India VIX is high, it means there is a lot of uncertainty and fear in the market. If it is low, it means the market is more stable and predictable.
Volatility is not negative for all investors. Some analysts and investment gurus see it as an opportunity to buy undervalued companies. World's one of the most successful investors Warren Buffett said “The true investor welcomes volatility".
Investors look at the volatility index to measure market risk, fear and stress, before making investment decisions.
Shrey Jain, founder and CEO of SAS Online said the lower VIX can create a sense of stability and increase investor confidence and can lead to a more positive investor sentiment and potentially attract more investment into the market.
Jain believes lower VIX may be beneficial for long-term investors, for short-term traders, who rely on market swings for profits, have few opportunities during less volatile times.
"While lower VIX is allowing investors to make decisions based on underlying fundamentals and long-term strategies rather than being driven by short-term market fluctuations, it is beneficial for investors but indicates missed opportunities for traders, as low volatility levels can lead to a decrease in trading opportunities as traders who rely on price swings and volatility to generate profits may find fewer opportunities in a low volatility environment," said Jain.
Investment opportunity or time to book profit?
Several analysts warn the trend of low volatility may see a reversal and investors should remain cautious about this possibility. Also, since the India VIX is at a low level at this juncture, there is a high probability that the volatility index may revert to its mean range which is the 15-20 range. This may cause a market correction.
Aamar Deo Singh, Head Advisory at Angel One highlighted that India VIX is currently trading between 13-14, indicating that investor sentiments are muted, however, concerns with regard to recessionary fears in the US and Europe are also playing upon the minds of the investors.
"India VIX staying too low for too long is also a signal that the market could take a key direction in the coming weeks. Any spike above 20-25 for India VIX will be the first warning signal. Investors are advised to be slightly on the cautious side, and be selective in stock selection, rather than adopting an overall approach," said Singh.
Santosh Meena, Head of Research at Swastika Investmart also observed that the volatility index currently stands at a multi-year low which suggests a prevailing sense of complacency in the market. However, he added that historical patterns show that India's VIX has typically been unable to sustain such low levels for an extended period.
He believes it is reasonable to anticipate a potential increase in market volatility in the coming days. According to market correlations, heightened volatility often coincides with market corrections.
"Traders find the India VIX particularly valuable as it provides insights into market sentiment and potential price fluctuations. They can use this information to make informed decisions regarding their trading strategies. On the other hand, investors can utilize the India VIX as a tool for profit booking or to make fresh entry decisions into the market," said Meena.
"During periods of elevated VIX levels, indicating a high level of fear in the market, it can be an opportune time for investors to consider entering the market. This is because valuations tend to be more reasonable during such periods of market uncertainty. Conversely, when the VIX is excessively low, it may be a suitable time for investors to consider taking some profits off the table," Meena said.
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Arvinder Singh Nanda, Senior Vice President of Master Capital Services believes there is the possibility of a U-turn in the volatility index since it is currently near its key support zone.
"India VIX formed its all-time low at 8.75 in June 2017, while the all-time high stood at 86.63 in March 2020. The low VIX readings indicate a sense of complacency or a lack of awareness of potential risks in the market. This could be a warning sign that investors are not pricing in enough risk, and a sudden shock to the market could lead to a significant sell-off. So, a low VIX scenario is always not suitable for long-term investment," said Nanda.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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