Investment strategy | Volatility: How to Invest Safely in a Volatile Stock Market

In financial markets around the world, volatility is used to statistically describe the expected range of price movements of a security or a stock index. Usually expressed as a percentage, it is an indication of the risk implied by any investment in the underlying instrument at any given time. Generally speaking, the higher the volatility, the higher the risk associated with the investment and therefore a higher volatility index value portends an atmosphere of fear in the markets.

In our equity markets, India VIX is the primary volatility indicator and is a volatility index based on Nifty Index option prices. When tensions between Russia and Ukraine escalated in the last week of February, India’s VIX jumped almost 60% and was accompanied by an 8.5% drop in the index benchmark market Nifty50. However, volatility has since subsided with the Indian VIX returning to previous levels and the Nifty50 recovering all the lost ground. For most retail investors, this recent market behavior only serves to highlight the vagaries of stock markets and hints at essential investment advice for successfully weathering periods of market volatility.

Adopting an equal-weight, mid-cost approach to equity investing can not only protect your invested capital, but also help generate significant returns by taking advantage of periods of depressed prices. By assigning an equal weighting to all companies in a portfolio, capital allocation will also follow the same trend and will essentially help to mitigate the risks associated with being overly reliant on a particular stock or sector. Cost averaging refers to the practice of consistently investing equal amounts in your portfolio at regular intervals, rather than investing all at once. A combination of both approaches can help build a portfolio that can withstand all market scenarios with the potential for higher returns.

Diversify your portfolio by investing in multiple asset classes or investment avenues like mutual funds (MFs) (both debt and equities based on investors’ risk appetite), debt-linked debentures PMS market, the PTC, gold, etc. can provide peace of mind during times of heightened volatility. Additionally, including a healthy mix of small-, mid-, and large-cap stocks in one’s equity portfolio can create much-needed diversification in terms of both risk and return potential. The allocation of capital between the different investment products or avenues must be planned according to one’s risk profile and financial objectives.

Focusing on instruments or investment products with strong fundamentals and building long-term positions during times of heightened volatility can generate good returns, as volatility is higher in the short term and decreases as the horizon increases. time increases. This involves conducting research and analysis of the investment instrument (return and risk analysis), understanding the pedigree of the issuer or company offering the security, assessing the overall economic scenario, etc.

As the spread of Covid-19 heads into the endemic stage, the long-term outlook for asset classes like equities continues to remain positive as demand continues to recover across all industries and sectors. Although it is highly unlikely that one can predict every wild move in the stock markets, it is possible to sufficiently protect one’s stock portfolio from short-term market movements by adopting simple strategies and following a methodology of long term investment.

(The author, Raghvendra Nath is managing director of Ladderup Wealth Management)

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