Stock market volatility: Lessons for investors

Equity markets are unpredictable and are bound to rise and fall over a period. Having said that, volatility is perceived by different investors’ differently. For some, market volatility is a caution, for some it offers an opportunity and then there are others who are stuck between the two.

Volatility simply means the liability of an underlying asset or index to change fast and unpredictably. In relative terms, the market going up one day, and falling the other day repeatedly is called market volatility. Fear, anxiety, insecurity, nervousness and stress are some of the emotions experienced by investors’ during a volatile phase. The challenge remains in overcoming such emotions and remain committed towards investments.

A disciplined investment approach to investment via the Systematic Investment Plan (SIP) route is the most effective way to deal with market volatility. By investing in a systematic manner, cost-wise SIP works in your favour, as you get to buy more units whenever the market falls, and lesser units when the markets are rising.

Know how to invest, where to invest

Knowing the method to invest is half the battle won, the other half is in knowing where to invest. This is where we recommend hybrid funds for investors who are averse to market volatility. Within the larger hybrid space, we have products such as Equity Hybrid/ Debt Hybrid and Dynamic Asset Allocation funds. Equity Hybrid funds have a higher bias towards equity, while Debt Hybrid funds have a higher bias towards fixed income instruments.

A Dynamic Asset Allocation fund invests in a mix of equity and fixed income instruments. The allocation between these two assets classes is managed dynamically so as to provide investors with long-term capital appreciation. If you are wary of volatile markets and at the same time would not want to miss the opportunity to benefit from potential gains in the equity segment, then this fund suits you a lot.

In case of Dynamic Asset Allocation funds, some fund houses follow an in-house built robotic investment model. The investment decisions are based on this model which lay larger emphasis on the momentum of the existing trend.

From a taxation perspective, as long as equity holding in such funds is below 65%, the funds are taxed as per debt category. In case of debt funds, capital gains from investments held for more than three years are taxed at 20% post indexation. Indexation is a process, which allows you to adjust the cost of inflation over time. As a result, your cost of investment gets inflated to the extent of real inflation. For example, your investment of Rs 10,000, considering 4% annual inflation, would be valued at Rs 11,249 in the third year. And if you were to exit your investments at Rs 12,000, your taxable income would be Rs 751, as against the actual gain of Rs 2,000. This way you save on tax.

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In the given environment investors could also consider investing in Fixed Maturity Plans (FMPs). FMPs are close-ended debt mutual fund schemes, which lock in returns at current yields. Given the fact, that current yields are close to 8%, the net returns post taxation can be quite good because of the indexation factor.

Investors should remember one thing, there is no running away from volatility when it comes to investments, instead treat volatility as your friend and invest wisely.

By D P Singh. The author is ED & Chief Marketing Officer (Domestic Business) of SBI Mutual Fund