How you can gain from market correction:Don't close your SIP
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DIPIN KWATRA
Jan 24, 2011, 1:30:44 AM1/24/11
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How you can gain from market correction
No. Don’t even think about it. Closing the SIP in your equity mutual fund, that is. That’s one of the most common mistakes that retail investors in mutual funds do when markets start sliding.
If you stop an SIP when markets go down, you defeat its very purpose. Most of the experts we spoke to said that markets could dip further in the short term but were confident that it would pick up after 3-4 months. “Investor should use these 3-4 months to buy in small quantities,” says Ambresh Baliga, vice-president at Karvy Stock Broking.
That’s true. While the market sentiment is certainly bearish, there is no reason to panic. “Make good use of the correction,” advises D.D. Sharma, head of equity research, Anand Rathi Securities. For long-term mutual fund investors, this means continuing with their SIPs and buying more when markets dip further.
“Investors should disregard market noises and continue with their SIPs,” says Waqar Naqvi, CEO of Taurus Mutual Fund. The stock and sectoral diversification that mutual funds offer mitigate the risk to a great extent. If chosen with care, a good mutual fund will fall less than the broader market in a bear phase and rise more than the average during a bull run (see table).
This may also be a good time to review your portfolio’s asset allocation. If you find that the equity portion of your portfolio has grown too big, it may be time to book profits and shift some money to the safety of debt. But they must keep in mind that there could be a tax implication or an exit load when they switch out of a fund.
Switching is easier and more tax efficient for Ulip investors. Up to 15 switching transactions in a year are free. Also, the profit they will book from switching out of the equity option is tax exempt. If you are a Ulip investor, you could consider switching from the equity (or growth) option to the debt or liquid options.
When the markets correct, you could re-enter the equity option at a lower price. This strategy requires a basic knowledge of the markets and the Ulip. One should use it only if he understands his policy features and is conversant with the switching procedure.
For investors in direct equities, the advice is fairly straightforward: Stay away from momentum stocks and risky small-caps. Such stocks face the brunt when the bears attack. A small-cap stock that falls 25% may suddenly appear very attractive but experts warn against averaging.
If you stop an SIP when markets go down, you defeat its very purpose. Most of the experts we spoke to said that markets could dip further in the short term but were confident that it would pick up after 3-4 months. “Investor should use these 3-4 months to buy in small quantities,” says Ambresh Baliga, vice-president at Karvy Stock Broking.
That’s true. While the market sentiment is certainly bearish, there is no reason to panic. “Make good use of the correction,” advises D.D. Sharma, head of equity research, Anand Rathi Securities. For long-term mutual fund investors, this means continuing with their SIPs and buying more when markets dip further.
“Investors should disregard market noises and continue with their SIPs,” says Waqar Naqvi, CEO of Taurus Mutual Fund. The stock and sectoral diversification that mutual funds offer mitigate the risk to a great extent. If chosen with care, a good mutual fund will fall less than the broader market in a bear phase and rise more than the average during a bull run (see table).
This may also be a good time to review your portfolio’s asset allocation. If you find that the equity portion of your portfolio has grown too big, it may be time to book profits and shift some money to the safety of debt. But they must keep in mind that there could be a tax implication or an exit load when they switch out of a fund.
Switching is easier and more tax efficient for Ulip investors. Up to 15 switching transactions in a year are free. Also, the profit they will book from switching out of the equity option is tax exempt. If you are a Ulip investor, you could consider switching from the equity (or growth) option to the debt or liquid options.
When the markets correct, you could re-enter the equity option at a lower price. This strategy requires a basic knowledge of the markets and the Ulip. One should use it only if he understands his policy features and is conversant with the switching procedure.
For investors in direct equities, the advice is fairly straightforward: Stay away from momentum stocks and risky small-caps. Such stocks face the brunt when the bears attack. A small-cap stock that falls 25% may suddenly appear very attractive but experts warn against averaging.
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“Don’t try to catch falling knives,” says Ashu Madan, national head of equities, Religare Securities. “Small investors should focus on protecting capital right now,” says Sunil Jain, vice-president, equity research, Nirmal Bang Securities.
As panic sets in, small investors tend to buy and sell more often. Worse, they get tempted to enter the dangerous minefield that the futures and option market is. Nirmal Jain, chairman of India Infoline , warns against this strategy. “Trade less and do not leverage. Small investors should focus on building a portfolio of quality stocks,” he says.
Experts are also unanimous that small investors should stay away from risky sectors. Capital intensive sectors such as construction and real estate will be especially hit due to the liquidity crisis. Some experts feel that even banking stocks could face rough weather due to slippages in their treasury income.
“Switch to defensive sectors and wait before re-entering,” says Sunil Jain. The IT, pharma and FMCG sectors are seen as the best defensive bets in this market.
In all this, it is important to keep the basic tenet of stock investing in mind. Equities should not be seen as short-term bets but as long-term investments. Enter the stock market with money you can afford to keep locked in for at least 3-5 years. If you invest with a short-term horizon in mind, the results would be disappointing.
“Switch to defensive sectors and wait before re-entering,” says Sunil Jain. The IT, pharma and FMCG sectors are seen as the best defensive bets in this market.
In all this, it is important to keep the basic tenet of stock investing in mind. Equities should not be seen as short-term bets but as long-term investments. Enter the stock market with money you can afford to keep locked in for at least 3-5 years. If you invest with a short-term horizon in mind, the results would be disappointing.
source:ET WEALTH
Kind Regards
Dipin Kwatra
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