How investors can make sense of market madness

Markets have been volatile and will continue to be so. However, if the investors are with a long-term window, history says that you will come out a winner.

The investor community must be going through a torrid time. From May 11, the markets have been on a downward spree, except for few days in between followed by even sharper downtrends. More so, because investors have got used to seeing an uninterrupted rise in the markets.

You just can’t expect the markets to continue at this kind of breakneck speed. The extent of fall was initially increased by forced selling due to margin calls in futures and options markets. However, this was only one of the factors. Weakening global market, inflationary pressures and increasing interest rates all added up.

The month of May saw redemptions from the FIIs. This was countered to an extent by the buying done by domestic mutual funds. However, this made the liquidity of domestic funds go down. Going forward, in the short term, global investor sentiment will hold the key.

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This correction in the markets have made valuations more attractive. While at one time, the price-earnings multiple was trading at 22 times, it has come down to 17 times. But it’s still high if compared to the earlier all-time high, which was 14.7 times in 1995.

However, all this has not changed the fundamentals of the markets. The story of growth is still intact. You have the rising working class with rising income levels, reducing dependence on agriculture sector.

No wonder, all of this leaves an investor totally confused. Should he he stay invested, or withdraw, or perhaps make fresh investments? Here, the importance of basic investing steps cannot be stressed. Time horizon is an important element in equities. It has been proven that equities as an asset class tends to outperform other asset classes provided the horizon is long term. The longer the investment horizon, lower the risk.

Markets have been volatile and will continue to be so. However, if the investors are with a long-term window, history says that you will be come out a winner. Another key is to identify the performers and hold on to them. Unfortunately, this skill set is available to far and few. So if you don’t belong to that category of investors, mutual funds with established and proven track records could be a good option as they are being managed by professionals which have a better understanding of markets.

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Of course, equity is an asset class where the exposure should be limited to an individual’s risk taking appetite and capacity. Don’t enter equities just because your friend has doubled his money in a few days. Think rationally. investment which doubles in few days may take a day to come down by half.

The bottomline: Medium to long term markets are still attractive. But please don’t expect the dizzy returns you have got over the past couple of years. Expect more reasonable returns of around 12-15%. This is, of course, still better if compared to other asset classes.

(The author is Principal Consultant, Asset Managers)