MUTUAL FUNDS

We Recommend That Investors Utilize the Market Volatility to Add Exposure to Indian Equities<
16-Jun-12   12:24 Hrs IST

Mr. Sivasubramanian KN
1) How does one go about investing in equity markets when the environment is uncertain?

Global and local events over the past few months have made market participants, the media and other observers overtly negative and bearish. While issues impacting the Indian economy are well known, there seems to be an air of despondency on the back of comments by global rating agencies as well as the latest economic data. In such an environment, it pays to take a dispassionate view of the current scenario and understand what lies ahead.

Economic data is clearly pointing towards a slowdown, India remains relatively better positioned in terms of growth rates. We believe the economic cycle as well as the earnings cycle are bottoming out.

Corporate India's track record, book value trends and lower leverage provides comfort and leading companies are well placed to take advantage of any economic upturn.

While the rupee has depreciated, the fall needs to be seen in the context of increased global aversion and that it is in line with the pressure on EM currencies.

We believe that in periods like these, one needs to take a hard look at the facts, fundamentals and the future potential.

2) What should investors do to tune out the short-term noise and focus on the long term opportunity in equity markets?

We recommend that investors utilize the market volatility to add exposure to Indian equities as they remain a good route to capitalize on the long-term growth potential of the domestic economy. Few simple strategies are -

Invest for the long-term

Whilst this often repeated phrase may sound clinched, it is the simplest and most effective way to invest in equities. Markets always fluctuate, but the possibility of losing money diminishes as the investment horizon increases.

Stay invested. Watching from the sidelines may cost you.

During volatile times it helps to stay invested rather than trying to move in and out of markets. In any case, market timing i.e. buying at absolute lows and exiting at exact peaks is difficult to achieve (unless by luck) as market moves tend to be sharp and quick over shorter time frames.

Smart Investing

Interestingly there is a section of Indian investors that looks at sharp declines as a buying opportunity. Indian mutual funds have received positive net flows into equity funds during times of market corrections. For example, net flows were positive Rs 7,661 crore in 2011, when the BSE Sensex fell by almost 26%. The reverse was true when markets moved up sharply in 2010.

Despite the recent rebound, the sentiment in Indian and global equity markets is on the weaker side and pressure on policy makers across the world is increasing. Unlike 2008, the reasons for the slowdown in India are domestic in nature and constructive actions from the government can alleviate stress.

For us, periods like these have historically provided good investment opportunities and such a pessimistic environment is more often than not, a pre-cursor to a rally. Industry data clearly shows that there is a section of Indian investors who have been taking advantage of any sharp falls and increasing exposure to equity funds. Given that current market valuations are undemanding, we believe that investors should tune out the short-term noise and focus on the long term opportunity. History clearly shows that Patience Pays!

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