Making sense of market volatility

Even as there are no clear directions in the markets, should investors revisit their portfolios?

The stock markets were beaten to a low of 17,463 on February 10, 2011, down 15 per cent from a high of 21,005 on November 5, 2010. The slump came on the back of surging crude prices, rising interest rates and high inflation. After a brief lull, the Sensex somewhat recovered towards April, dipping or rising on company-specific news, like in the case of poor State Bank of India (SBI) results or Larsen & Toubro’s impressive quarterly numbers, or the global markets. It is not surprising to see the Nifty lose or gain one per cent on a single day.

This volatility has been the order of the day and will continue to be so for some time. It may have left many retail investors anxious about their investments. In fact, any positive movement in the stock market always attracts retail investors, irrespective of whether they understand the repercussions or not.
 

WHAT YOU SHOULD DO...

• Rejig your portfolio only if the allocation has changed by over 10-15 per cent
• Markets have been volatile but haven’t changed fundamentally
• Financial planners suggest sticking to last year’s asset allocation
• Good time to include more largecaps; beaten down after fourth-quarter results
• Book profits on midcaps and buy at cheaper levels
• If not bought earlier, buy and accumulate larger midcaps

Some, like Kolkata-based Ashu Sharma, think this to be the right time to follow what market experts keep saying all day long on television channels: “Buy on dips”. This 29-year old thinks market correction means cheaper valuations.

Certified financial planner Gaurav Mashruwala says, “If you have decided on a specific asset allocation, you should go for a rejig only if the same has changed by over 10-15 per cent.” Say, you have a debt-equity allocation of 40:60 and the same changes to 50:50. Use the opportunity to buy more equity. After the fourth quarter results, there are many largecap stocks that have corrected and this could be a good time to buy them.

SBI is one such example. It has cleaned up its balance sheet and is expected to perform better in the coming quarters, say market experts. The bank’s share price took a major hit, falling over 15 per cent after the fourth quarter results were announced.

Motilal Oswal sees Infosys’ margin guidance as conservative and embedding the worst case. The brokerage recommends buying aggressively, with a price target of Rs 3,400.

However, financial planner Kartik Jhaveri’s prompt reply is a ‘no’. “Markets have been volatile, but haven’t moved much. Even the fundamentals have not changed dramatically. Investments are where they were last year.” He dissuades investors from even touching their portfolio. “We maintain the same asset allocation as advised last year,” he adds.

Experts say the current market volatility should not be viewed as something out of the ordinary. There are no major structural changes in the markets calling for a portfolio rejig. Ideally, markets moving up or down are no reason to change the balance. Retail investors should have a two-three years’ view and such short-term volatility should not make any difference to them.

Typically, you should have 80-90 per cent of your equity portfolio in largecap stocks or funds, with the remaining being in mid- and smallcaps. According to mutual fund rating agency Value Research, largecap funds returned slightly over 12 per cent, as on June. Mid- and smallcap funds gave 7.5 per cent in the same period.

Radhika Gupta of Forefront Capital says, “Do not touch your investment in large caps. However, midcaps have corrected quite a bit and could be bought if not already a part of the portfolio. If you already have mid caps, you could book profits on it (if held for over a year) and bought at cheaper levels.”

However, she advises caution when investing in this space. Buy funds instead of stocks, she suggests. To begin with, you should not buy midcap stocks by yourself. Instead, mid cap funds would be safer. If you do buy stocks, unlike largecaps, where four-five of these can make your portfolio, you should at least have 15-20 midcap stocks to make a portfolio. Last, buy larger midcap stocks Ideally, the ones on CNX midcap index or Nifty Junior would be safer bets.