Rollercoaster ride of equities in 2022 – Ways to handle market volatility
Concerns about domestic corporate earnings under pressure due to rising input costs. On the global front, more aggressive rate hikes by the US Federal Reserve, recession and inflationary fears could impact the market performance hereafter
The year 2021 was a rewarding year for investors with key equity market benchmark S&P BSE Sensex returning ~21% and there were massive expectations that the rally will continue in 2022. However, despite a strong start the equity market has been highly volatile till April 2022. Evident from the chart 1 below showing the performance of the S&P BSE Sensex till April 2022 which looks similar to the image of the rollercoaster ride.
The lacklustre performance of the equities in 2022 is due to persistent sell-off of the domestic equities by the foreign institutional investors (FIIs) worth Rs 1.71 lakh crore from January to April 2022. Russia-Ukraine war which caused massive spike in the global crude prices, concerns about rising inflationary pressures across the globe including India. Some of the other factors causing market volatility and ways to deal with it is listed below:
Going forward some of the key events that could drive the market performance are shift in the Reserve Bank of India’s (RBI’s) monetary policy stance amid rising price pressure back home along with gradual revival in economic activity. Concerns about domestic corporate earnings under pressure due to rising input costs. On the global front, more aggressive rate hikes by the US Federal Reserve, recession and inflationary fears could impact the market performance hereafter. Hence, investors need to be cautious and design a well-planned move to counter the market swings.
- Keep emotional biases aside and stay calm as equities have been volatile several times in the past and gradually recovered in response to positive developments. Investors should avoid redeeming their investments or stopping their systematic investment plan (SIP) in mutual funds amid fear and anxiety. Let the money work for you by remaining invested for the long term to reap the compounding benefits.
- Well diversified portfolio across different asset classes and within asset classes makes it easy to ride through market volatility. Team up equity with other assets such as debt, gold and other alternative assets. Within equities spread money across different sectors, stocks, market capitalization and style of investing.
- Avoid investing in haphazard manner on the basis of the tip or rumour to make the quick bucks. Use of future and options, margin trading to take advantage of the market volatility is best suited to seasoned short-term traders whose goal is make to quick bucks in the short time and not for the novice investors.
- Avoid overdiversification or investing in the initial public offering (IPOs) and new fund offers (NFOs) which is making headlines. Evaluate whether the NFO or IPO is actually doing any value addition to the portfolio. Focus on quality and ensure the portfolio does not have higher concentration risk when the market is volatile.
- Investment in the bouquet of the mutual fund schemes which could be equity oriented, hybrid and debt oriented is crucial for meeting both the short term and long-term goals. Choice of the funds should be done wisely and prefer investing in those schemes which scores high on consistency, strong portfolio attributes, better risk ratio and low expense.
In the times of the increased volatility, focus should be building an investment portfolio which scores high on quality and consistency. Seeking help of the financial advisor, monitoring whether the investment portfolio is in line with the overall risk appetite, return expectations, goals, age and income levels and staying unscathed by the market volatility is the best to navigate in the tough times.