Four strategies to help you navigate uncertain markets

stay invested

There is always the temptation to hold back on investments when the markets appear to be in a downward spiral. But those who are sitting on the sidelines waiting to invest, or planning to resume their systematic investment plans (SIPs) and other investments once the market improves, are effectively trying to time the market.

This is a risky strategy to adopt because there is no way to predict when the market will bottom out. The market may go up before the investments are made and the investor may miss the opportunity they were waiting for.

For instance, the return from the Sensex in the last 15 years could have gone down from 12% to 7% for an investor if they missed just 10 days during which the return from the market was the highest. The corpus they accumulated would be lower by more than 100% just because the investor missed those 10 days. Since there is no way to predict these days, the only way for an investor to be able to benefit is to remain invested in the market. It is also important to keep periodic investments, such as SIP, going because it helps you accumulate more units when prices are low.

If you have cash to invest, don’t rush to pour it all in at one. Instead, deploy it over a period of time, say the next two quarters, since the markets may see some more dips before there is consolidation in the economy and they finally see an upturn. “When the markets are falling, it is a good opportunity to invest. It is an event- driven move, and when the event passes the fundamentals, such as corporate earnings, will take priority once again and drive markets," said Dilshad Billimoria, director, Dilzer Consultants Pvt. Ltd, a SEBI registered investment advisory firm. “Our advice to investors is to hold on and use the opportunity to invest in a staggered manner since valuations are attractive," she added.

goals are key

One way to keep equity market volatility from spooking you is to focus on your financial goals and create a portfolio that reflects them.

If a goal is well into the future you shouldn’t have to worry about how the market behaves in any interim short-term period. “For an investor who is saving for say, their retirement, which is 10-15 years away, an event such as this, which may have only a six- to eight-month impact on the market, is a very small blip in the larger scheme of things. For such investors, there is no need to react to it at all," said Billimoria.

If you have nearer-term goals, your portfolio should not have a large exposure to equity in the first place, and should instead be tilted in favour of steady fixed income products. This would mean that your portfolio wouldn’t be impacted too much by equity market volatility. It would, therefore, be easier for you to ride out market ups and downs.

While the valuation can be tempting, it can be risky to invest in certain asset classes without keeping your goals in mind. “Investors who have short-term goals should not consider investing in equity at this stage just because the valuations look attractive. There is no way to predict how far away the recovery is, and they may end up getting caught short," said Billimoria.

The key to building a portfolio that does not cause too much discomfort is to base your investment decisions on an asset allocation that reflects your goals and ability to manage risks. An investor’s ability and inclination to handle risk will determine the exposure to equity in their portfolio, even for long-term goals. As the goals come closer reduce the exposure to equity to reduce the risk of a large fall in the corpus due to a decline in the equity markets. A lower equity exposure means that your portfolio will decline less and it will be easier for you to ride out the market decline.

diversify more

Your portfolio should be diversified across financial assets like equity and debt, as well as physical assets like gold, to contain the volatility. In a period of uncertainty, a diversified portfolio helps cushion the extent of drawdown in the portfolio from the poor performance of some asset classes. Make sure your investments are truly diversified to make the most of a downturn.

A portfolio that holds equity across sub-asset classes like large-, mid- and small-caps, will not see much protection when the markets fall. All segments of the markets will see a decline, though some may be more vulnerable than others. Exposure to asset classes like debt, gold and international funds can help off-set some of the impact of a falling equity markets. However, in some situations, like we are seeing now, markets around the globe tend to fall together. “People have been worried about the equity market fall, but in the same period gold and debt have done very well, and that has reassured investors that it’s not all bad", said Saurabh Bansal, founder, Finatwork Wealth Services, a Sebi-registered investment advisory firm. “International funds too are a definite addition. The drawback is that most of those currently available are US-based funds, and we see value in having the option to invest in different countries, geographies, sectors and commodities," he added. Billimoria pointed out the added variables, such as currency risks, which have to be considered while evaluating international funds. The extent of exposure that an investor is willing to take to such investments will also determine the benefit to the portfolio. A nominal exposure of say 5% or 10% will not significantly help in stemming the fall.

need to Rebalance

Once the investor has decided on an asset allocation that works for them, they should stay with it till their circumstances change. For this, the portfolio has to be regularly rebalanced. This involves trimming exposure to the asset class that has run up, and therefore forms a greater portion of the portfolio than originally envisaged, and buying more of the asset class whose value has declined. Effectively, rebalancing makes you buy when markets are low and sell and book profits when prices have run up, thus putting the focus on the opportunity that a falling market provides, rather than the loss in value.

“We had started to redeem money out of equity funds around the end of 2017, when we felt valuations were stretched. Some of the money went into debt and gold and some we held in liquid funds to deploy as opportunity arose. We will be deploying the funds over the next six months in a staggered way," said Bansal. Surplus cash can be used to quickly correct asset allocation. Periodic surpluses can be channelled into the asset class in which investment has to be increased. “We are also reaching out to see if clients have a surplus that they can deploy or increase their SIPs," he added.

Another way to alter allocation is to switch between mutual fund scheme categories. “Switching from debt funds or other categories into equity may involve costs and taxes and that is not something we want to hurt our clients’ portfolios with", said Billimoria. A hybrid fund that invests in two or more asset classes is an easy way to hold a rebalanced portfolio. The drawback is that the asset allocation of the fund may not reflect the investor’s preferred allocation.

Rebalancing also ensures that the risk in the portfolio stays at a level that is suitable for the investor. If the allocation to equity is depleted by a market fall and is not restored, then the benefit to the overall portfolio returns when markets do turn around will be limited since the portfolio now has a lower exposure to equity. This will translate into a lower corpus and the risk of goals not being met. Similarly, if the proportion of equity is allowed to run up in the portfolio and not trimmed down when markets are going up, it will make the portfolio’s returns more volatile than what the investor is comfortable with.

In a volatile market, risk aversion is exaggerated and there is a tendency to seek safety. Many are also tempted to take advantage of the opportunities that a declining market offers without assessing their own ability to take the volatility. But knee-jerk reactions may do more harm than good at this juncture. It is best to stick to the basics and follow the process of asset allocation, portfolio selection and rebalancing keeping your goals and risk profile in focus. It will help you take interim market movements in your stride without risking your financial security.