The stock markets here have rallied quite significantly, around 50 percent, since March. The rally started with the global looking up, and the positive signals back home like the clear election results and good corporate results.
The current market rally which started with some select blue-chip stocks has turned quite broad-based over the last few weeks, and there has been good participation from mid-cap and small-cap stocks as well. The rally has been quite good in the stocks and sectors that were severely beaten-down during the market crash last year. For example, banking and real estate stocks have recovered smartly.
Increased volatility in the markets has also been witnessed during this rally and especially in the last couple of weeks. The markets hit the upper circuit filter for the first time after the election results and then consolidated over a few days before recording some good gains last week.
Here are some factors that are contributing to the volatility in the markets:
Investors chase rally
Currently, investors are looking at buying at dips in the stock markets. Many investors missed the rally that started in March and hence do not want to miss out on any opportunity to buy at dips.
This is leading to a rush to get into the markets . Investors do not wait for long these days and enter into the markets as soon as they dip 4-5 percent, even if the correction is a couple of days long or even just one day long.
On the other hand, there are investors who want to book profits at higher levels as the markets have already gone up by 50 percent during the last three months. As a result, there has been a lot of volatility in markets these days.
Economic reforms expected
The markets have factored in the positive news of a stable government at the centre. There was a sharp rally after the election results were declared. Investors are waiting for the full budget presentation by the new finance minister in the next couple of months. There are huge expectations around the pending economic reforms, especially since there is a stable government at the centre.
Volatility in global markets
The volatility in the global markets is another key driver of sharp movements in the domestic markets. Also, the current market rally has led to traders regaining confidence. They are more active in the markets these days. Increased speculation has also contributed to the volatility in the markets.
Here are some points that medium and long-term investors should keep in mind while investing in the stock markets:
For risk-averse investors
The outlook for the domestic economy and stock markets is much better and the confidence of large institutional investors is coming back after the formation of a stable government.
Investors with a low risk appetite, holding their entire investment corpus in debt instruments, can look at diverting a small percentage into the equity markets, as the returns on debt instruments has started falling due to the Reserve Bank of India's actions.
Investors with the inclination and time to invest directly in equity can look at entering large-cap stocks at dips. The markets are expected to remain range bound around 10-15 percent from the current levels.
Other investors can look at investing in equity mutual funds after checking the past track record of the mutual fund (both positive as well as negative market conditions).
For high-risk investors
The markets are expected to remain range-bound in the next few weeks, at least up to the budget, before making the next decisive move.
Investors with a high risk appetite can look at accumulating potential mid-cap stocks, as the largecap stocks have run up quite a bit during the recent rally.
Investors should also keep enough liquidity in hand to take advantage of any sharp corrections and also to take care of their personal needs.
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