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Wednesday, February 26, 2020

Six crucial investment tips to stay ahead when there’s turmoil in the markets

Uncertain times in stock markets demand an analytical approach to investment and not taking any rash decisions.

Written by Adhil Shetty | Updated: February 25, 2019 1:05:33 pm
Markets turn down the volume when the World Cup starts Representational image. (AP Photo/Koji Sasahara)

It wouldn’t be entirely wrong to say that we’re going through a period of economic uncertainty, and the Indian economy is no longer immune to external uncertainties as the world gets more inter-dependent than ever before.

The major spike in India-Pakistan tensions following the recent terror attack in Pulwama has only worsened the situation. Then there’s the ongoing trade war between the US and China, which is nowhere close to a resolution. The US has imposed sanctions on Iran and Venezuela choking the global crude oil supply – something that’s pressurising the Indian Rupee.

On the domestic front, the banks have not yet recovered from the Non-Performing Assets crisis, the Non-Banking Financial Companies are facing a liquidity crunch, and the realty market has not shown signs of growth in the last three years — so, the overall economic situation seems to be volatile.

But what should your investment strategy be during times of turmoil? Should you be aggressive or stay defensive? Here are six crucial investment tips:

1. Be wary of rumours

Rumours spread like forest fires in a panic-stricken economy. Social media adds more fuel and people tend to gravitate towards negative news. Worse, rumours cloud their analytical thinking and they don’t even bother to verify the information they consume.

As an investor, you should leave no stone unturned to ensure you stay away from rumours and only rely on credible outlets like reputed newspapers, TV channels and websites for authentic information. Believing in rumours can force you to make a wrong investment decision, like liquidating your entire portfolio at a loss, only to regret the decision when markets revive later.

So, avoid rumours and practice strict due diligence before making any investment decisions during uncertain times.

2. Don’t panic

When investing money, it’s important to avoid panic in all situations. Panic-stricken decisions often turn out to be costly mistakes. You’d be well-advised to continue with investment decisions that are aligned with your financial goals, even during uncertain times.

There have been several occasions in the past when the equity markets crashed, and reached new highs, in the same year. During adverse times, it’s difficult to ascertain how serious the problem is and how long the economy may take to recover – so it’s better to keep calm, and carefully study the various alternatives before taking any major decisions.

3. Diversify your investment across different asset classes

Stock markets are usually quicker to react to turmoils than debt instruments. A tried-and-tested strategy to deal with a crisis is to diversify investments across different asset classes. Fixed income instruments like fixed deposits, recurring deposits, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate, short-term debt mutual funds, etc. are good options to consider when markets are down. You can overcome the negative market sentiment by investing in low-risk instruments and still earn a decent return to beat inflation.

Your priority should be to protect capital. Select an investment product based on your risk appetite, return expectation, and liquidity requirement that’s in sync with your financial goals. When markets are down, investment in gold can also work as a hedge against inflation. You can also explore prospects like the Sovereign Gold bond that provides capital appreciation, and earns interest, too.

4. Don’t rush to rebalance your investment portfolio

In times of turmoil, when equity markets fall significantly, your exposure to debt instruments may increase, resulting in your portfolio getting skewed. The condition of the markets may not improve immediately, so avoid rushing into rebalancing your portfolio by investing more money into equity, or switching money from debt to equity products. Wait for the markets to stabilise before rebalancing your portfolio.

5. Avoid value traps

You may find several scrips trading at a much cheaper rate than its intrinsic value. Stay away from value buying in such a situation because every other scrip may seem attractive to you. Several downward corrections may follow one after another, so putting all your money into a value trap may not be helpful.

6. Opt for staggered investments

It’s crucial that you stick to your investment strategy and do not take chances during uncertain times. Once you find that the market is less risky, you can start investing in the equity instruments in a staggered manner. SIP investment is a good option. It’ll help you to average out the investment and quickly earn profits once the market bounces back.
Until markets recover, investing in fixed income instruments is a safe bet.

The writer is CEO, BankBazaar. The article has been published in collaboration with BankBazaar. Opinions expressed are those of the author.

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