Of crests and troughs

MARKETS AND YOU: Volatile markets can easily give you ulcers; the time is ripe to analyse your investments and rejig them.

All is well when markets are on a bull run. But good things too come to an end. While the mature mind tells you that corrections are a good sign, there are a few who rejoice an overdue correction of the stock markets.

In the past six weeks, the Sensex and Nifty have gone southwards by almost 16 per cent, from life-time highs of 14,720 and 4,245 (from February 2007 ) respectively.

However, the real bad news is not just the correction but the the market's volatility. This is not likely to end. So the time is ripe to take a re-look at your investments in the market and update strategies.

As usual there are are mixed views about the direction in which the Indian stock markets could move from here as the Indian markets have to deal with the double whammy of being insulated from international markets as well coping with domestic nuances.

So while a fall in the market during the Budget day could be attributed to the Chinese effect, the finance minister did not help exactly by coming out with a not-too-inspiring Budget.

And on top of that, the 6 per cent inflation coupled with the hike in interest rates give you a heady mix of negative factors looming large over the stock markets.

As Mukesh Dedhia, director of Ghalla & Bhansali put it, "With falling stock markets, high interest rates, spiralling property and metal prices becoming common across the globe, there is every risk that a dip in any one asset class will have a cascading effect on the others. What's worst is that the impact would be seen across the world."

On an optimistic note, the market could cheer up in the new financial year with an increase in the government spending.

According to technical analyst, Deepak Mohoni, managing director, trendwatchindia.com, " The trend is clearly moving upwards which means for those having a medium term outlook, it may be a good time to get into the markets".

His advice to long term investors is hold on to long term stocks for the moment. So what is the worst case scenario? -According to Dedhia, the market could remain volatile for the next six months. He expects the government to be able to manage inflation and interest rates begin to soften.

Ideally none of the volatility should matter to the long term investor whose investment horizon is anywhere between 5 to 7 years.

"Irrespective of where the market stands, most investors will do themselves a favour by defining what their long-term and short-term financial needs are", says Dhirendra Kumar,CEO, Value Research. Adds Agrawal , " For a long-term investor, the current drop in the

values of his investments will become an actual loss only when he decides to get out of the market. Till then it remains a notional loss".

So what should one be doing in this market? - For starters, begin by changing your mindset about the market. Lowering one's expectations from the market too is a big step towards enjoying the returns from the market.

"Expecting impossible returns from the markets year-on-year seems to have become the norm with most investors. Especially since returns in the past five years have been high", believes Ramdev Agarwal, CMD of Motilal Oswal. 

HIGHS AND THE LOWS
Month	Sensex	Sensex return  YOY (%)
3-Mar	3049	-12.10
4-Mar	5520	81.10
5-Mar	6493	17.60
6-Mar	11280	73.70
7-Mar	12706	12.60
Source: Motilal Oswal

However, if you require cash in the short-term, it might be better to make good of whatever profits are possible and exit. Also, if you need cash in the short-term and have never invested in the markets, you may opt for fixed income instruments because they are at least not volatile. At the current interest rate of 9.5 per cent for a three year period, fixed deposits are attractive no doubt.

Even if you are investing excess/surplus funds, spreading them over different instruments would be ideal. Strictly avoid lumpsum investment and opt for different instruments over a period of time. This helps average out losses, if any.

Yet another strategy could be re-shuffling and re-balancing your asset allocation in order to counter the waning fortunes in one asset class. For instance, if you have decided on 30:70 debt-equity ratio and because of the falling markets the ratio has today changed to 50:50, you could take out 20 per cent from your debt and invest back in the market.

Or, if you are uncomfortable with the ratio then you could change it to 40:60. But it is important that you do not change your asset allocation too often. Ideally, you should change it only once in two-three years. And, if you have a relook at your investments, it would be good to shuffle your portfolio to include sectors that benefited from the Budget.

And of course, the virtues of the systematic investment plan (SIP) have been extolled upon time and again. It obviously works. SIP helps in averaging out purchases.

The average investor is likely to enter the market when it is doing well, thus losing out on the cream of profits. If the same investor had entered the market through SIP, he would at least be staying away from taking a call on the market.

And what should you expect? Financial advisors believe that average returns from the market should be more or less in line with the current GDP growth (9 per cent ) and inflation rate (6 per cent). Going by this calculation, expecting a long-term average return of 15 per cent from the markets should be satisfactory.

In short, timing the market is not a very smart idea, especially when the markets are volatile.

Make any investment based on the quality of management (whether mutual or stocks) and its capability to deliver. The numbers will automatically follow.