Tips to help you negotiate volatile market conditions

The stock markets here have yielded good returns over the last one year as the economy is back on the growth path. The strong performance in the stock markets is backed by a solid mop-up by domestic funds and strong inflows from foreign funds.

As the markets scale new highs, there is more volatility to contend with. Valuations are no longer cheap and investors who invested at lower levels look at booking profits, adding to the volatility.

These are some of the significant factors contributing to volatility in the stock markets:
Investor sentiment

Investors and analysts across the globe are divided on the sustainability of the global economic recovery.

There are factors like a bulging deficit in the US, risk of sovereign default in some of the European nations, and the rising inflation rate in some Asian economies.

These concerns are not totally baseless and hence, analysts are keeping a close track on the developments around these issues.

Another recession triggered by any of these factors could be much more damaging and long-lasting.

Therefore, there are panic waves in the markets every now and then triggered by some of these factors.

Global currency fluctuation is another fall-out of the various developments happening in the global arena.

Growth and inflation

This is one of the few economies in the world that have almost recovered from the slowdown. However, the challenge here is to contain the inflation rate which has crossed comfort limits.

The Reserve Bank of India (RBI) has taken steps by tightening the monetary policy to establish control over the inflation rate without impacting the growth rate. However, significant results are yet to be seen as the inflation rate is not showing any signs of cooling down.

This is another area of concern in the stock markets as a rising inflation rate would warrant harder actions from the RBI, and that may affect the growth rate of the economy.

The stock markets have appreciated quite a bit over the last one year and the valuations are no longer cheap at the moment. Analysts believe the economic fundamentals and corporate performances do not justify further sharp appreciations from the current levels. However, if the foreign fund inflows continue, the markets might scale up to new highs.

Here are some strategies for investors in the current market conditions:

Investors with low risk appetite:

Investors with a low risk appetite should look at investments in blue-chip stocks (preferably index stocks) or mutual funds, with a long-term perspective.

Historically, it has been seen that index stocks give a good return over the long term and come with relatively much lower risk.

Diversification is the key in volatile and uncertain investment conditions. Investors should look at investing in diversified stocks and equity-based instruments as well as debtbased instruments.

It is important for investors to track global market movements and study the reasons behind any sharp corrections.

Take cautious decisions while investing in stocks which do not have any specific reason to take a severe beating.

Investors with high risk appetite:

Investors with a high risk appetite should look at riding the volatile market waves to make short-term gains.

Investors should have a part of their equity portfolio invested in low risk instruments and look at making short-term gains in volatile markets with the remaining kitty.

However, analysts recommend trading in the markets with a tight stop-loss trigger during volatile market conditions.

A stop-loss trigger helps in cutting down losses and conserving cash in order to be able to invest further and not get stuck in a bad stock.

Booking profits or part-profits at regular intervals is recommended in volatile market conditions.