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What you should do in a range-bound market

It is time to be defensive. The trick is to pick up every available opportunity to add returns bit by bit
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A RANGE-BOUND market is always on the move, but going nowhere! The ‘buy and hold’ will just eat away returns and may not even deliver return equal to say an fixed deposit (FD). Therefore, it is frustrating for a long-term investor since it eats into real returns. It is also frustrating for an arbitrageur since volumes generally drift lower and the bid offer of price makes it difficult to make money. Then, there are day traders, who still have work to do since their horizon is short.


However, sideways movements generally are preceded and succeeded by large bouts of volatility, which invariably take a toll on some large leveraged players. This leads to some active players withdrawing from the market leading to further liquidity squeeze. However, all is not lost!


Let me attempt to outline the investment strategies in a range-bound market for a normal average investor, a large savvy investor, day traders and introduce a new breed called ‘swing traders’.


The first dimension is a psychological one and here are some ground rules in this market.


Firstly, in a range bound market, buying any stock, going on a holiday and coming back to see your stock double or triple is not going to happen.


Secondly, a good money management will help accumulate more returns systematically than anything else.


Thirdly, for investors — who do not have current investment and have no compulsion to jump in without homework — the markets are not running away anywhere. Lastly investors, who are already invested, doing nothing and just hopping will not stand to gain either.


For the normal average investors, who are infrequent, it is best to watch stocks, which are fundamentally good in Sensex or Nifty. Then watch the movement and buy near the 52-week low, wait for exit at say 10% profit or even lower if it starts turning. One needs to book the losses if they start extending to say 5% below the 52-week low. One has to be patient and buy only when there are signs of stability at the lows but must never take eye off the scrip. A ‘buy and hold’ strategy is not recommended. If one is short of time for doing homework, indirect investment through mutual funds or SIP will be better.


To reiterate, good money management is critical in these times. For large savvy investors, usage of options can come very handy. To give you an example, let’s say an investor is holding a large concentrated holding. A good way to generate yields is to sell out of money calls. You can pick up close to 1.5% return for a month and if that price is a hit, you get out at profit plus the premium and can re-enter when the stock drifts down again.


Due to low liquidity and momentum, however, it becomes hard for jobbers (who buy and sell for a very small movement) to make large monies. It is better that they continue to stick with the large liquidity stocks. The velocity of trades does come down. It is important to guard against compulsively putting trades on account of habit.


It is critical to review the portfolio in which one is already invested. The way to repair a portfolio is either through use of derivatives (if one understands the risks of the same) or simply a sector rotation. Then move into large cap defensives and play the swing game. The trick is to pick up every available opportunity to add returns bit by bit.


The key is awareness that there are times to go on the offensive and then be defensive at other times. In range-bound markets, it’s time to be defensive, look at the risk levels you are running at an overall portfolio level across the full savings and make every penny work.


Small returns will add up to a tidy sum.

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