Taking investment call in volatile mkts

A good asset allocation strategy and a cool head can see an investor through turbulent markets.

It has been two full years of bottoming out for the global markets,yet there is little certainty where the world is heading on the economic front. There are more questions than answers with regard to global issues: the European contagion,the US economy,etc. While no investment strategy guarantees absolute positive returns across all time frames,managing wealth rationally helps one face volatility in a better way. In volatile market conditions like the present,it is worth remembering the basics of long-term investing.

Asset allocation is crucial

The following points are important with respect to asset allocation:

Diversification: Asset allocation help achieve diversification leading to optimal returns with lower volatility. Appropriate diversification should be considered across all asset classes i.e. fixed income,equities,real-estate,precious metals 8211; though not limited to them alone. Also,investment through equity mutual funds is the best way to pursue investments in the stock markets. Choose mutual funds across different fund families which have differentiated stocks 8211; this could vary across scheme mandates across fund houses as well as international funds etc.

Importance of liquidity:

Individual needs vary so does the reaction of people to the same market volatility. A well culled-out asset allocation helps reduce anxieties,thereby providing the required ammunition in the form of cash to take advantage of any short term aberrations.

Pay attention to details: Investments made should be in sync with the income requirement. If one wants regular income,one should choose the dividend option rather than trying to time redemptions. Most well managed equity mutual funds give regular dividends.

Systematic investment plan: SIP is a much better route when it comes to investing in mutual funds. Market declines at times can be unsettling. Instead of planning for such scenarios,taking no action i.e. simply doing nothing may work better provided one has a well thought out strategy with planned diversification within equity mutual funds. SIP is the best way to participate in equities. It is a process that helps one invest a pre-determined amount at regular intervals into mutual funds.

Avoid overreaction: People overreact to unexpected and dramatic events by placing too much weight on current events. Investors get emotional,biased and are either over-optimistic or pessimistic. They tend to get too optimistic about markets when the near-term prospects are good and vice-versa. Although overreaction can lead stock prices to abnormally high or low levels in the short term,prices adjust to the investments intrinsic worth in the long term.

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Volatility a boon to contrarian investors: A contrarian equity investor tends to have an advantage when markets are volatile. With his eye firmly fixed on fundamentals,he scouts for opportunities by identifying the extent of overreaction at moments of peak optimistic and pessimistic. This however requires two attributes: one,a correct assessment of the intrinsic value of business and two,a firm belief that stocks prices would trace their value over time

A contrarian investor can be best described by this quote from Shakespeare: There is tide in affairs of men which,taken at the flood leads one to fortune. u

Author is Head- Equity,Mirae Asset Global Investment