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How to make money in volatile stock market ?

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The stock markets have been volatile since the last few months mainly due to the uncertainty in the developed markets, especially in the Euro region and concern on domestic growth rate. The inflation rate remains high even after many rounds of monetary policy tightening by the Reserve Bank of India (RBI).

Investors have been left wondering what strategy to adopt and how to tackle the volatility. A volatile market provides good opportunities to create wealth. Let us look at how one should go about for this and what should be his or her strategy.

Don't panic

It is important not to value your investment on a daily basis or at a very short interval. The market prices of investments are bound to go up and down in the very short- term and in short-term too but patience is always rewarded in the medium- to long-term.

Be realistic, and exit

It is important to have realistic expectations while investing in equity-based instruments and book profits once the target is achieved. Investors expecting unrealistic returns often end up investing in high-risk instruments and loose their hard-earned money. Suppose you buy a stock for ~100 and have a target to earn 20 per cent in a year's time. However, if the stock moves up sharply on news or business performance in a shorter time span, don't wait for the year, you may exit and invest the same in a fixed income instrument or a bank fixed deposit.

Limit stocks

Investors should not have too many stocks and instruments in their investment portfolios. Having a limited number of instruments in the portfolio makes it easy to track the performances of the investments and have all relevant information about the investments you have made. Also, it is advisable to invest in defensive stocks such as pharma, fast moving consumer goods (FMCG), information technology and so on.

Asset allocation

It is always better to split the investments between debt and equity based on one's risk capacity.

By doing it that way when the market is down 20 per cent to 30 per cent you have money to buy and rebalance the portfolio instead of not having any money to buy since it is all locked up in equities. Debt while delivering lesser returns gives stability and a peace of mind. This makes investors less irrational whenever there is a crash in the equity market. Equity and debt are usually negatively correlated.

Use SIP

Investing in equities via Systematic Investment Plans (SIP) or Systematic Transfer Plans (STP) is a good strategy. By way of SIP, you invest a fixed amount which starts from ~500 on a periodic basis for a defined time period. If you have a lump-sum but wish to invest that every month systematically, you could opt for an STP where money is debited from a liquid fund in the same fund house and transferred to the equity fund as per the period specified by you. If you are in doubt whether you should enter the market now or not, opt for the SIP route of investment via mutual funds. Ideally SIPs should be subscribed for a longer investment period of say two years or greater than two years.

Tip for Nifty traders

An analysis of S & P CNX Nifty for the last one year from January 27, 2011 to January 25, 2012 has thrown up some interesting facts.

Taking the closing value of Nifty as on January 25, 2012 and the average value of Nifty for the last one year, it was found that the Nifty had closed 132 and 145 times above these two values out of the 249 trading days. This meant that in a bearish market too, the index had given positive returns on more than 50 per cent of the days.

 

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