Fw: From the ED's desk: Investing in volatile markets

 

Dear Vikas Thakur, In the backdrop of market volatility, it is but natural to find ourselves confused; and traders whipsawed by market swings. Naturally FIIs seem to have factored in the mood of the moment, which is evident from their flows. In the circumstances, what one must do, becomes the most pertinent question. To elaborate a bit, some issues that have left the sentiment bruised in the past few months are: the fate of PIIGS (Portugal, Ireland, Italy, Greece and Spain) economy and their bailout; the stability of labour markets in developed countries like the US and the UK; a rising debate over the revaluation of the Yuan, which could be accentuating labour market problems in the developed markets; and also, rising geopolitical tensions between North Korea and South Korea. How all this impacts markets on a day to day basis is even more difficult to decipher. Yes I know it is difficult to stay firm on a long term perspective when the boat is rocking at this very moment violently. That is why I have picked this particular graph of our historical VIX, just to indicate and make the point that it is during the most fearful times that the best investments are made. VIX or the 'fear-index', is nothing but a measure of the expected market volatility, in the near term. But if one looks carefully, one can easily make out that window of periods where VIX has moved up quickly, have given good opportunities to investors to buy. So if you were holding yourself from investing, these are the right signs, indicating good investing opportunity. Do study the graph below: Now the question is: which is the best way to enter. You could either 'time' the markets (i.e. enter at the lowest point) or invest a fixed sum of money into the markets at a regular frequency or infact purchase a fixed quantity of shares at regular intervals. Now lets compare how these strategies would have worked in retrospect, had you for example, invested in Maruti from May 2007 onwards. If one had invested a fixed sum at the end of every month (rupee cost average) to buy Maruti during entire bull and bear phase, the average price of a Maruti share would be Rs 875, on an investment of Rs 10,000 per month. This is a gain of 41% from current prices of Rs 1,237 (CMP). Here you were able to buy more when markets went down and less when prices moved up. The rupee cost average price will always be better than the simple average price of the stock - Rs 982 (the option of purchasing a fixed quantity of shares at regular intervals). If one had tried timing one's entry, one could have bought Maruti at the lowest level of Rs 520 (up 138% from CMP), however in case one had mistimed it, then one would have lost 27% from the highest price levels of Rs 1,699. One can neither predict nor rely on timing the markets, however, by investing a fixed sum of money regularly, one can make best out of the upward and downward movements in the markets. Further, lets look around and take note of the hectic economic activity. More automobiles are being sold than ever before; airports are jammed with passengers; home prices have already crossed or are threatening to cross previous highs in most places. Now financial markets are a derivative of the real economy. So, as the GDP continues its momentum, the markets will start reflecting that. It is the lead and lag of the real economy and its reflection on markets that baffles the investor in us. So what are we expecting? Well, given the overall sentiment and sensitivity of Indian markets to FII flows, we expect to see volatility in the markets in the short term. However, from a macro perspective, India is perhaps the best place to invest in. Falling commodity prices; better than expected revenues from 3G auctions and anticipation of normal monsoons, will further help drive GDP growth and also improve the overall fiscal management. Thus there is little reason to be away from the markets. But while we invest in markets, we must be prepared for market risks. However with correct and well planned asset allocation, we can make the markets work for us best by investing regularly, and in a disciplined manner, with a long term (around 5 years) investment horizon. But then if you are not comfortable doing all the planning or are simply short on time for doing the homework on stocks, you can be guided by the homework we do on your behalf and follow our recommendations closely. The other way is to participate indirectly through the mutual fund route or through a Unit Linked Insurance Plan. Afterall, there are a few simple realities we must be cognizant of. One, that to meet our life's goals, we must invest. Two, it is impossible to time the markets. And three, it is advisable to stay invested to get the best out of the markets and get adequate returns. As the market shifts course and changes directions, do expect to hear from me again. In the meantime, do make the most of it.   Best regards, Anup Bagchi Executive Director ICICI Securities Limited     To unsubscribe please click here Disclaimer