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Debt instruments safer in volatile markets

Here I have tried to lists out some investment options that are relatively safer in volatile market conditions

The stock markets are on a downward trend from the beginning of this year. Volatility in the markets is also quite high. There are many factors that contribute to negative market sentiments. For example, a persistent high inflation rate (especially the core inflation rate that is driven by basic commodities), rising commodity prices in global markets, anticipated slowdown in the global economy etc.

Foreign investors were investing heavily in emerging markets. They are now taking out money, especially from emerging markets. Large foreign investors are bearish on global growth and expect the global economy to deteriorate. They believe that in the era of a global slowdown, emerging markets will under-perform their global peers. Foreign institutional investors (FII) have taken out around $5 billion from the domestic markets so far this year.

Since the stock markets are in a sideway movement and not doing very well, equity funds are also not delivering good returns. In fact, most of them delivered negative returns over the last six months and many investors lost their money in equities and equity-based funds. Global stock market analysts' valuations in the domestic markets were overstretched last year. This is why investors witnessed huge corrections this year. Some analysts feel the domestic markets will remain in a sideway movement in the short to medium term (next six months or so) perspective.

Here are some safer investment options in volatile market conditions:

  • Tax-saving options

Since the markets are quite volatile and risky for investments, investors can concentrate on completing their tax-saving limit under Section 80C and keep the option open for investments in the stock markets during the later part of year. There are various options available for investors. Provident fund is one. The primary feature of these instruments is to build a fund for long-term needs (retirement). Insurance is another. Investors can look at investing in life and medical insurance in the present time to fulfil their insurance needs. The primary feature of insurance is to provide risk cover to investors against any unforeseen future event.

  • Potential equities

Investors with moderate to high risk appetite and a long term investment horizon can look at investing in blue chip stocks of select sectors. Many blue chip stocks are trading at attractive valuations in the market. Investors can invest in these sectors based on a careful analysis.

  • Debt mutual funds

Debt mutual funds invest in safe instruments like corporate debt, money market instruments, call money etc. The main objective of debt funds is preservation of principal, accompanied by modest returns. Debt funds are ideal for investors who want to take very little risk, are uncertain about the interest rate scenario or who are uncertain about what they should do with their money in the short term.

  • Cash

Investors looking to invest in stock markets should keep some amount of liquidity at their disposal. The valuation of some stocks and sectors will become quite attractive if the market goes through another fall of 5-10 percent. Investors should identify a few stocks and watch them to make investments.

Bank deposits are good for short-term investors. Short term bank fixed deposits yield 6-7 percent returns. Nowadays, many banks offer funds sweep-in and sweep out facility where a balance beyond a certain limit automatically gets converted into a fixed deposit and banks pay fixed deposit interest on it. This type of arrangement can be an option for the short-term horizon.

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