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Business News/ Money / Personal Finance/  5 investment tricks to tide over inflation and market volatility

5 investment tricks to tide over inflation and market volatility

Amidst the current atmosphere of fear and trepidation in the market, investors are now rearranging their portfolios with a long-term view and an attempt to mitigate losses from market fluctuations. Many have done away with debt funds, short-term debt funds are now more preferred, there is continued buying of fundamentally sound stocks and buying gold in large quantities is now back in vogue. 

Riding market volatility amid geopolitical concerns and economic downturns (Pixabay)Premium
Riding market volatility amid geopolitical concerns and economic downturns (Pixabay)

So many investors are discussing ways of making the best possible bet during these times of inflation and volatility. Macro factors like the Russia-Ukraine war, an aggressive increase in rates by the US Federal Reserve, a steep rise in the inflation rate, weaker quarterly results posted by many companies and a rising number of Covid-19 cases in both China and Europe have triggered a sudden fall in many international stock markets including India.

The falling stock markets have hit the prices of some shares hard. Even the fundamentally good stocks have taken a beating, thus, prompting many long-term investors to rejig their portfolios. Many people have shorted their positions considering the constant turbulence in the market. Those invested in the debt market are likely to gain from higher yields as the Reserve Bank of India (RBI) announced a hike in its repo rates. The RBI’s move is clearly in the direction of taming inflation than reviving the economy.

Investors are optimistic though some maintain that the market is yet to experience a frenzied move that will help many to decide their future course of investments.

Revisit your portfolio

In this age of volatility and inflation, the focus must be on planning investments with a long-term view. To start with, decide on an asset allocation that does not rely on equities alone. Include some short-term debt funds too to avail of the benefits of better yields stemming from an expected hike in repo rates by the RBI. Inflation has a diminishing effect on the value of our assets. It may not be easy to reign in the inflation. However, we can include gold as an effective hedge against rising prices due to inflation. You can either put some money in Sovereign Gold Bonds (SGBs) or invest in gold mutual funds or park some of your earnings in gold ETFs. Choose the ETF with the highest volume and liquidity. Then slowly list those stocks that you had planned to buy on dips. Refrain from gambling away your money by investing in companies with a high debt-to-equity (D/E) ratio. Momentum stocks must be avoided at this stage. This is the time that calls for investing in quality stocks slated to rise in the long run, thus, adding value to your portfolio. Target maturity funds in the fixed-income category.

Equity buying strategy

The current market correction has given another opportunity to investors since March 2020 to invest in their choice of stocks. Investors who once rued about having not enough to pay for high-priced shares are now comfortably poised as some shares are trading at roughly 30-50 per cent discounted prices. However, the debate regarding the choice of stocks has left many investors confused.

Many analysts argue in favour of buying quality, large-cap stocks of fundamentally sound companies. Suresh Sadagopan, founder, Ladder7 Financial Advisories said, “My advice is against buying stocks, especially, in a turbulent time like this. Investors can look to invest through mutual funds. A flexicap fund would be ideal as that allows the fund manager to choose the equity to be invested across the board, which is crucial in turbulent phases like this. Another strategy would be choosing a Nifty 500 index fund where you participate in the entire market and there is no bias or selection concerns."

The focus must be on looking at the fundamentals and the cash flow of the companies. Apart, there has been a sea change in the mindset of investors owing to the recurring undulations in the market. There is a clear preference for value over growth. Gaurav Rastogi, CEO,, “If we look at S&P BSE Midcap Index compared to Nifty 50 for the last 20 years, every time it has outperformed Nifty 50 it has given back all of the outperformance subsequently. Investors will need to reset expectations lower than in the past as increasing rate environments are usually harder for mid-cap and small-cap companies."

Responding to further dips

Further dips are anticipated with the US Federal Reserve predicting further rate interest rate hikes. The RBI is slated to follow suit with a further rise in repo rates in its coming meetings. Investors are becoming more risk-averse with their sentiments being hit hard by the seemingly unending bear run in the market. However, this does not rule out the possibility of many new investors entering the market to build wealth in the long run.

Many investors have turned fearful looking at the constant erosion in the value of their investments. Deepali Sen, Founder Partner, Srujan Financial Services said, “The nature of equity is volatility, it should not be a surprise to long-term investors who are willing to take risks that markets have taken such a turn. The markets have corrected nearly 17 per cent in less than seven months. The sale of existing holdings or purchasing more in them through fresh monies should not be decided as per the market levels, but as per one’s goals. It is very simple to understand, DO NOT invest in equity markets for any of your goals having a time horizon of less than seven years. If this criterion is met and you understand volatility, you can look at buying more, else stay put. Avoid sale at this stage (until and unless you need the money in a couple of years) as the loss is already made."

Targeting debt funds

Debt funds have found favour with very few investors to date. The recent market corrections saw investors abandoning debt funds despite the hike in interest rates. The Association of Mutual Funds in India (AMFI) data reveal more funds outflow from debt funds compared to equity funds. The assets under management (AUM) of debt funds fell constantly on both a year-on-year basis and a month-on-month basis.

The best idea is to invest in target maturity debt funds provided the investors’ investment horizon matches the target date. Another rate hike is anticipated with the RBI expected to meet again to discuss the same in a few days. However, the benefit of holding target maturity debt funds till the maturity date is that investors continuing to hold them would earn returns similar to the yield-to-yield maturity owing to the less impact of volatility near the target date.

Apart, investors can consider parking their money in floating rate bonds. Since these bonds are issued for a short tenure only, the risk inherent in these bonds is much lower than the long-term bonds. Sadagopan explains, “In a rising interest rate scenario, debt fund NAVs will end up getting impacted negatively. In a floating rate bond, the underlying papers will be linked to the Mumbai InterBank Overnight Rate with a spread and will closely track the interest rate movement. Hence, this product may be a good choice till the rising interest rate scenario persists."

Use gold as a diversifier

The yellow metal is fancied by many for its shine. The price of gold has gone up steadily in the past few months amid economic downturns. The metal’s strong performance and continuing uncertainty in the market due to inflation and geopolitical concerns have prompted many investors to allocate a greater percentage of their portfolios to gold investments.

Now investors are falling in heap to invest their money in gold ETFs as an essential hedge against rising inflation. Apart, when the market falls and the value of all investments goes down, the rising price of gold makes up for the loss in the portfolio. This mitigates the losses responsible for many investors exiting the market untimely.

The monthly data by AMFI underscore how gold ETFs saw net inflows of Rs 1100 crores in April alone. Similar inflows in gold ETFs were last seen in February 2020. The demand for gold ETFs can also be attributed to the fact that the RBI had not issued any SGBs this year, thus, prompting many to look for alternatives underlying gold investments.

Funds during volatility
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Funds during volatility

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Published: 16 May 2022, 01:19 PM IST
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