Make the most of market volatility

The downtrend in the equity markets over last week should come as a relief for investors who have a good chunk of their portfolio in equity. Since February, the markets had not given an opportunity for investors to go bargain hunting as the indices have been moving in one direction.

Even when corrections did happen, the bounce-back was swift, making it difficult for those who missed the bus. The trend, once again, reiterates the fact that timing the market is a difficult task and investors are better off taking a medium to longterm view.

As the markets get increasingly globalised and different assets have pull and push pressures, timing and betting on the short term has become a challenge.

Equity portfolio:

While holding on to an equity portfolio in general is a welcome strategy, its execution is a tough challenge. Often, investors are tempted to book profits in a rising market on the fears that a correction might rob them of the returns.

Similarly, history has shown that a company on a downslide need not reward an investor who has been patient with his timing. So, profit-booking becomes an integral strategy for an equity portfolio and the methodology could be different .

It is in this context that a volatile market helps an investor reassess the performance of his equity holding . So, how does one make a good use of the volatility or intermittent market corrections?

Market trends:
In the case of direct stocks, investors need to track both stock trends and the general markets as it is not necessary for a stock to follow the market mood. As has been the case in the recent times, a number of stocks have run up on their own oblivious to the market mood. If the stock price correction is in line with the overall trend, investors can use volatility to make shortterm gains.

For instance, in a downtrend , a particular stock with good fundamentals can be acquired and sold after a couple of months during an uptrend. Such a strategy is rewarding but requires patience. Similarly, those with a large chunk of shares in a single stock can trade in a weak market.

In both cases, execution is a challenge as often investors don't use the funds to buy back the same stock and instead get stuck with fresh stocks at higher prices in an uptrend.

SIPs vs STPs:
One of the best options to manage gains with stocks is to allocate a portion of the portfolio for a short term and use it strictly for shortterm trading.

While 'short term' is a debatable point, it need not always be day trading . For instance, a threemonth horizon for a stock can provide returns in the range of 10-20 percent absolute returns when timed well.

Volatility management is much easier in the case of mutual funds as a number of products are available to take advantage of volatility. If the advantages of a systematic investment plan (SIP) are well-documented , new-age options like trigger facility, daily SIPs or systematic transfer plan (STP) from a debt fund into equity have widened the choice in this category.

Risk profile:

However, while such products do enable investors to take advantage of volatility, they are profitable in the long term as the accumulation of units is a slow process.

For instance, if an investor puts Rs 1 lakh in an equity fund and decides to opt for STP of Rs 1,000 on a daily basis, the entire fund transfer into equity fund might take a period of 3-4 months. If the stock markets were to be in an uptrend during this period, the investor may have to wait for a minimum of a couple of years to get the gains as the average cost of the fund would be higher.

Hence, it is imperative that one should take an approach depending on the allocation percentage and risk profile rather than merely following the market trends as volatility is the only constant factor for an equity market.