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Marriage of Conviction and not Marriage of Convenience

Author: Balaji Rao/Sunday, March 18, 2018/Categories: Cover Feature, Expert View

Marriage of Conviction and not Marriage of Convenience

It is said that it pours when it rains; the present state of stock market is very similar to this proverb. After having positive triggers for about 10 months that propelled the markets from 30000 to 36000 between April 2017 and January 2018, the law averages have taken over. The market, post-Budget, started its downward journey due to negative triggers, the main reason attributed to imposing of long term capital gains tax on income from equity. Another unexpected trigger that has added to the market turmoil is the Nirav Modi-PNB scam, and there could be more bad news that may fuel further correction of the indices.

If we look at the history of stock markets, after every bull phase there has been bear phases or correction phases which is quite natural and acceptable as well. Though everyone knows that markets are not efficient (it cannot be), but when markets get into this zone, an uncomfortable feeling starts seeping in which will lead to pessimism across the participants; these are dark and depressive clouds.

Almost every stock’s prices were ruling ahead of its fundamentals since liquidity across the strata of investors had started to chase only one asset class which was equities. Low bank interest rates, fear that has set-in after demonetisation, wider and stringent tax net, increased awareness about formal financial products (thanks to mutual funds sahi hai campaign, perhaps), rush to make higher profits in short time had all pushed the prices of stocks to unprecedented levels and correction was around the corner.

In fact, the equity market has seen sharp corrections in the recent past too; over 2000 points fall during January/February 2016 before the recovery happened and in mid-2015, the market had seen a sell-off and recovered smartly. Hence, market getting into a correction mode should be seen as healthy rather than fretting over it or seeking the cause for correction. Best of the cricketers, other sportspersons and famous actors have gone through such poor phases in their careers but have bounced back with vengeance; fundamentally good companies will remain to be good companies no matter what happens.

In the real sense correction phases should be converted into opportunities; most of the frontline stocks would be available at discount and one should look for bargain buying. Even a small quantity of purchase such as 25 or 50 shares at every opportunity makes a lot of sense; this can be accumulation phase in the markets.

For those who are scared of buying stocks directly they can enter the markets through the tried and tested route which are mutual funds. If you are an existing equity mutual fund investor make additional purchases on those days when market has fallen by over 300 points; preferably during this phase stick to large cap oriented schemes (Aditya Birla SL Frontline Equity, DSP Top 100, Franklin India Bluechip, HDFC Top 200, ICICI Pru Focussed Bluechip, Reliance Focussed Large Cap; illustrative examples and not a recommendation).

For new investors, it is better to start with balanced, large cap oriented and multi-cap schemes for the time being and once market stabilizes they can enter into mid-cap oriented schemes. Nevertheless, taking the systematic investment route (SIP) continues to be the best strategy that does not require to either time the market or check the portfolio performance.

Another strategy one can adopt now could be Systematic Transfer Plan or STP that offers a great opportunity during the present type of market circumstance. A lump sum amount can be invested in a debt scheme of a good fund house and transfer month-on-month about 10% of the original amount into a large-cap or multi-cap oriented equity scheme over the next 12 or 15 months. Once the market gets into the recovery phase the ROI can be quite handsome.

It becomes imperative now to remember the best two quotes of the modern day investment guru Mr. Warren Buffet: (1) Buy on fear, sell on greed; the markets may be is getting into the fear mode, utilize the opportunity. (2) Make market fluctuations your friend; when market fluctuate your systematic investing (SIP) works wonders on your portfolio and adds chutzpah to your long term returns. Follow the guru’s advice.

All investors have to note that when you have invested for long term, you have to only keep the destination in mind and in-between there are experiences of the journey; sometimes we reach early, sometimes we reach on time or sometimes we may reach a little late and that’s the reality of all long term journeys. Maturity is the key and also prudence.

Our investment in equity or equity related instruments should be a marriage of conviction and not a marriage of convenience and let’s remember that the former leads to true happiness. 

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Balaji Rao
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