The Ultimate Investment Framework to Beat Market Volatility
November 29, 2023 Mutual Fund
The Indian equity market has navigated its journey in 2023, encountering periods of both volatility and resilience amidst a backdrop of global economic uncertainties. The year commenced with a surge of optimism, fueled by expectations of strong domestic economic growth and a favourable earnings outlook for Indian companies.
However, these positive sentiments were soon challenged by a confluence of global headwinds, including rising interest rates, escalating geopolitical tensions, and fears of a looming recession. These external forces exerted significant downward pressure on the Indian equity market, triggering periods of volatility.
According to the Year-to-date (YTD) data, India’s two most prominent market indices, S&P BSE Sensex and Nifty 50, have been soaring close to their all-time high of September 15, 2023 (S&P BSE Sensex at 67,839 and Nifty 50 at 20,192).
Graph: Performance of Market Indices on YTD basis
Data as on November 24, 2023,
Past performance is not an indicator of future returns.
(Source: ACE MF, data collated by PersonalFN Research)
As of November 24, 2023, the S&P BSE Sensex closed at 65,970, and the Nifty 50 closed at 19,795. While the benchmark S&P BSE Sensex has managed gains of over 10% year-to-date, the NSE Nifty 50 index has climbed by over 12%. But the path has been far from smooth, marked by sharp swings and periods of apprehension.
Macroeconomic uncertainty, high interest rate, currency concerns, recessionary risk, etc., were among the key challenges India has been witnessing. However, despite these challenges, the Indian equity market has demonstrated resilience and optimism throughout 2023, rebounding from setbacks and showcasing its underlying strength.
This remarkable performance stems from a confluence of favourable factors, including robust domestic economic growth, a promising earnings outlook for Indian companies, and a relatively stable currency.
[Read: Why Balanced Advantage Funds Make Sense in the Current Volatile Market Conditions]
Indian equities have appreciated significantly in recent years and are still attractively valued compared to their global peers. This makes them an appealing investment destination for both domestic and foreign investors.
Having said that, the long-term outlook for the market remains positive, supported by strong domestic economic growth and favourable valuations. Investors should continue to focus on long-term investment horizons and maintain a diversified portfolio to mitigate risks.
Market volatility is a measure of risk, so the risk borne by market-linked investments in your portfolio increases as volatility increases. Since volatility cannot be avoided, it’s impact on your portfolio can only be controlled, and the right investment framework will be useful in this situation.
Despite the fact that there are various market phases, such as the bull run and the bearish period, having a sound investment strategy in place will help you weather any unforeseen market changes.
Here’s a 5-point investment framework to help you beat market volatility:
1. Establish clear investment goals and time horizon
Before diving into the market, defining your investment objectives is crucial. It helps you make informed decisions about asset allocation, risk management, and investment choices.
Your investment goal defines what you aim to achieve with your investments. Are you saving for retirement, funding a child’s education/wedding, or pursuing short-term gains? Understanding your goals will help determine your risk tolerance and investment horizon.
Your time horizon refers to the period you expect to hold your investments before needing to access the funds. It is influenced by your investment goal and risk tolerance. A longer time horizon typically allows for greater risk tolerance, as there is more time for investments to recover from any market downturns.
2. Strike a balance between risk vs reward
It is essential to strike a balance between risk-reward ratios for your investments. One needs to assess their risk tolerance and align it with the envisioned financial goals. The strategic approach you need to apply is to be overweight on quality and underweight on risk in your portfolio, especially with your equity mutual fund portfolio.
The risk/reward profile of your portfolio is determined by your asset allocation, which you may tune by establishing target ratios for various asset classes. Remember, there is no one-size-fits-all approach to investing. The key is to find a balance that is suitable for you and is aligned with your investment objectives.
[Read: Understand the Risk-Return Dynamics of Mutual Funds…]
When the markets are on a bull run, investors may tend to load up on Mid-caps, Small caps, Sectoral/Thematic Funds, etc. Never take on too much concentration risk when the markets are volatile. One may consider to restrict their portfolio allocation up to 5% to 10% in sectoral/thematic funds.
3. Diversify your portfolio
Diversification is a cornerstone of risk mitigation; it is the compass that guides your investment journey. By spreading your investments across various asset classes, industries, and geographic regions, you reduce the exposure to any single sector’s downturn during turbulent markets.
A well-diversified portfolio containing a broad mix of asset classes like equity, debt and gold will likely be less volatile over the long term than a portfolio concentrated in only equity or debt investments. In an all-weather portfolio, losses in one asset class tend to be offset by gains in other areas. So, if you want to mitigate the level of volatility in your portfolio, diversification is the key.
Diversification is a crucial strategy for long-term investment success; it reduces risk, enhances potential returns, and assists you in achieving your investment goals.
[Read: The 4 Key Market Trends that Could Drive Mutual Fund Growth]
4. Embrace rupee-cost averaging & power of compounding
Equity as an asset class is known for its inherent volatility, which can make investment in equities a daunting task for many investors. However, over the long term, equity has repeatedly proven to be one of the best performing asset classes.
While an investor cannot completely avoid volatility when investing in equities, one can definitely take measures to optimally manage volatility and also benefit from it. Instead of investing a lump sum, consider rupee-cost averaging.
Systematic Investment Plans (SIP) are an excellent way of tiding over volatility and creating wealth over long periods with the help of rupee-cost averaging and the power of compounding. SIPs involve investing a fixed amount at regular intervals, regardless of market conditions. This approach helps reduce the impact of market volatility and averages out your purchase price over time.
The power of compounding is a continuous cycle of earning and reinvesting SIP returns that leads to exponential growth, allowing your investments to snowball over time. The longer you invest, the more time compounding has to work magic. This means that even if you experience some market volatility in the short term, you are still likely to reach your long-term investment goals if you stay invested in worthy schemes.
5. Review your portfolio periodically
Apart from investing in the best suitable mutual fund schemes, optimally reviewing your investment portfolio periodically is also crucial to beat market volatility. As market conditions change and your investments grow, your portfolio’s asset allocation may deviate from your target mix.
Reviewing your portfolio is crucial for maintaining its alignment with your risk tolerance and investment goals, especially amidst market volatility. This will also help you identify the red flags in your portfolio, like the consistently underperforming holdings that are causing a decline in your overall portfolio performance.
[Read: Unveiling the Reasons Behind Mutual Fund Underperformance…]
Consider rebalancing your portfolio if the current asset allocation deviates considerably from the target allocation. This may involve buying or selling certain assets to align the allocation with your desired mix.
Schedule regular portfolio reviews, ideally every 6 to 12 months, to monitor your asset allocation and make adjustments as needed. By actively managing your asset allocation, you can help navigate market volatility, maintain alignment with your investment goals, and potentially enhance your overall returns.
To summarise…
While the Indian equity market has weathered the storms of 2023, the road ahead remains uncertain. Global economic headwinds continue to pose challenges, and investors will need to remain vigilant and adapt to the evolving market landscape.
Keep yourself updated on market news, economic trends, and company performance. However, avoid emotionally biased decision-making based on fear or greed. Stick to your long-term investment plan and avoid impulsive trades based on short-term market fluctuations.
Remember, investing is a long-term endeavour, and market volatility is an inevitable part of the journey. By following the above-mentioned investment framework, you can navigate market fluctuations, protect your capital, and achieve your financial goals.
[Read: How to Choose Mutual Funds For Your Investment Portfolio]
This article first appeared on PersonalFN here
