When markets are directionless...

Buy on dips, redeploy funds and, most important, stay invested.

In the past few weeks, investors in stock markets would have been flustered. Fears about the PIGS (Portugal, Ireland, Greek and Spain) economies led to a sharp fall in domestic market indices in one week. In the next, the announcement of a bailout package in Europe led to a recovery. The see-saw has continued as global incidents hurt and revive sentiments.

For instance, the day before yesterday, the Bombay Stock Exchange Sensitive Index, or Sensex, tanked 372 points, only to rise 169 points yesterday. Since April 7, the Sensex has fallen by 10.70 per cent and recovered 4.49 per cent — a net loss of 6.69 per cent. No wonder Pawan Hansraj, who saw his portfolio halving in the 2008 correction, is jittery. His motto: Restrict losses. His strategy: Shift 60 per cent of investments to large-caps. Hold 40 per cent in cash till the market settles down.

But investment experts provide solace to the likes of Hansraj. “No matter how bad the situation, it pays to stick to fundamentals. If you picked stocks after careful study and by believing in the business, be confident of your selection,” says Gul Teckchandani, investment expert.

Others see this as an opportunity. “The current correction actually provides opportunities to buy good stocks at reasonable valuations,” says Atul Singh, MD and head of the global wealth and investment management, DSP Merrill Lynch, India.

Existing investors
Those who have xinvestments in the market should first look at their asset allocation, say investments advisors. After the correction, equity allocation would have dropped. In contrast, debt and gold allocation would swell.

Restore your original asset allocation by booking profits in debt and gold. Plough the money back into equity. “We are advising investors to cut small- and mid-cap exposure and shift to large-caps,” says Singh. Small- and mid-cap stocks have seen a good rally in the past few months. Companies in this segment will witness more volatility in the short term.

“Getting large-caps that have sound businesses will reduce volatility of the portfolio. Large-cap companies are currently fairly valued and we believe this will be a good entry point in this segment,” says Singh.

Even mutual fund investors can cut down investments in mid- and small-cap funds and shift the investment to an equity-diversified fund. “However, make investments in a staggered manner as there would be volatility going forward. Put small amounts on every correction,” says Malhar Majumdar, a certified financial planner.

The first timer
For those who have surplus cash, this is an opportunity to start investing rather than waiting for any further dips. “If not cheap, our markets are reasonably valued. This is apparent from the expansion of earnings per share we saw during the results,” says Singh.

However, experts suggest first timers to be more cautious, not only because they are new to equities but also due to the expected volatility ahead. A first timer can start with a mix of mutual funds and direct stock investments.

Say, if you have Rs 1 lakh to invest and want to look at equities, this can be one strategy: Start a few systematic investment plans (SIPs, depending on your ability to fund them on a monthly basis). If you start, for instance, three SIPs of Rs 5,000, use the rest to invest in a debt mutual fund (liquid funds) and move the money through systematic transfer plans.

Nilesh Shah, deputy MD, ICICI Prudential AMC, says: “As a first timer, don’t wait to accumulate money to invest in equities. Start with small sums as early as you can and keep a long-term horizon.” For equity investors, Majumdar puts it simply: “Don’t get disturbed when markets fall or even euphoric when they rise”.

Now this is a lesson that will hold investors in good stead.