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Equity v/s Mutual Funds

Go for equity or MF based on risk appetite

Some tips for investors in these volatile times when it is difficult to choose between equity investing and safer options



The domestic stock markets have seen a historic bull run over the last four years. From the beginning of 2008, the markets are in a correction phase due to weak investor sentiments in the local as well as global markets. We have witnessed unprecedented volatility in the markets in the last few months, especially over the last 4-5 months.



In fact, the domestic markets are among the most volatile markets in the world (volatility in the Indian stock markets is much higher than markets in developed economies like Dow Jones, NYSE, Nikkei, FTSE etc). There were many days when the Sensex recorded more than 1,000 points (above five percent) intra-day swings.



The rise and fall of share prices (market direction) depend of various market forces. In fact, the factors that affect stock markets have increased significantly over the last one decade due to globalization and technological advancements. Volatility is an important consideration while computing risk, and hence, the return expectations from investments.



These are some market forces that directly or indirectly drive the stock market volatility:



1) Global factors

The US economy data is showing signs of recession. Many analysts believe that the bottom of the US economic crisis is not yet reached. Since the US is the largest economy in the world, people are not clear about its impact on world economy and markets, especially countries which are mainly dependant on exports to the US.



Commodity prices are soaring across the board be it food grains (wheat, rice etc), precious metals (gold, silver etc) or crude oil. All major commodities are trading near all-time high prices. This is another sentiment dampener in the global markets.



In past correction phases, the Indian market had been the biggest out-performer compared to other Asian markets due to foreign funds coming in. But in the last couple of months, foreign institutional investors (FII) remained net sellers in the markets. We have thus seen a sharp fall in the markets. Momentum mid-cap and small-cap stocks were the most affected in the markets.



2) Domestic issues

Many local events saw the markets react quite strongly in the past. For example, the Government's proposal to write off Rs 60,000 crores in loans to farmers, and SEBI's proposal on restriction of further investments through the participatory note (PN) route had created panic in the stock markets.



Strategies for investors

The question is what should investors do? Invest in stocks, mutual funds or debt instruments (bank fixed deposits, public provident fund etc). The domestic markets and businesses should not be impacted much by the US sub-prime crisis and recession. The Indian economy is the second fastest growing one in the world today. India's real GDP grew at an average rate of more than eight percent over the last three years. According to the Reserve Bank if India's projection, the economy will grow by a healthy rate of around 8-8.5 percent this year too. Also, due to the slowdown globally, many foreign funds and companies are looking at investments in India.



These are some points investors can consider while taking investment decisions:

1) Hold stocks with potential

Investors invested in fundamentally good stocks (blue chip companies or mid-cap companies with good order books, track record and management) should remain invested. Although investor sentiments are negative in the market presently, with time, things will improve and fundamentally good scripts do not take much time to recover losses.



2) MF for the risk-averse

Risk-averse investors and investors who cannot keep a regular track of markets would be better off investing in mutual funds. These investors can look for diversification and creation of an investment basket of mutual funds itself.



3) Front runners for long-term investors

Long-term investors with higher risk appetite can look for investments in blue chip and fundamentally good stocks. There are many front runner stocks trading 30 to 50 percent lower their peak levels. Investors can identify some of these front runner stocks and build their investment basket. The key is to invest in small chunks at every market fall and accumulate stocks in your investment basket. An ideal diversified basket should contain 6-8 stocks from different business domains.

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