Do you also get scared or get panicked during market movements or volatility??
If yes, then you must read this blog!
Since, last year markets are quite volatile due to various instances such as the Russia-Ukraine war, the Adani-Hindenburg controversy, the Silicon Valley Bank crisis, you must read this blog!
The equity market, in particular, can experience volatility, due to variety of factors such as changes in economic policy, geopolitical tensions, and global events.
What should an investor do during market volatility?
- Stay calm and avoid making impulsive decisions: It’s natural to feel anxious during market volatility, but it’s important to stay calm and avoid making impulsive decisions. Don’t panic and sell all your holdings just because the market is down.
- Review your portfolio: Use market volatility as an opportunity to review your portfolio. Check whether your portfolio is diversified across different sectors and asset classes. If you have a concentrated portfolio, consider rebalancing it to reduce risk.
- Stick to your investment plan: Remember, your investment plan and stick to it. If you have a long-term investment horizon, short-term market fluctuations should not impact your investment decisions. Stay focused on your goals and don’t let short-term volatility derail your investment plan.
- Avoid timing the market: It’s almost impossible to time the market correctly, even for experienced investors. Instead of trying to predict the market’s ups and downs, focus on building a well-diversified portfolio that can withstand market volatility.
Let’s take an example of the Indian equity market. In March 2020, the Indian equity market experienced a sharp decline due to the COVID-19 pandemic. The benchmark index, the BSE Sensex, lost almost 40% of its value within a month, causing panic among investors. Many investors sold off their mutual funds and shares & stock holdings, hoping to limit their losses.
However, those who stayed invested and remained patient were rewarded. Within a year, the equity market had recovered, and the BSE Sensex had reached new highs, surpassing its pre-pandemic levels.
This example highlights the importance of having a long-term investment horizon and a diversified portfolio. By staying invested and resisting the temptation to sell during market downturns, investors can benefit from the eventual recovery and growth of the market.
How to manage your risk during market volatility?
Diversify your investments by allocating assets across different types of investments such as stocks, bonds, and mutual funds to reduce the impact of market fluctuations.
Why is asset allocation important?
Asset allocation is nothing but distributing your money in various asset classes which is the key feature of diversification.
- Reduces risk bracket from investments: Even if any one of the investments fails to perform well in a year, the other investments average out the returns.
- Optimized Return: The returns procured are on average profits as the risk gets diversified, the return is comparatively higher than just investing in a single instrument.
- Makes market timing irrelevant: As investments are spread across various instruments, there is no need to track market volatility to find the right time to buy or sell.
- Aids in tax planning: Some investments may help us get tax benefits. Eg: If the MF is an equity-linked saving scheme (ELSS) or the FD is a tax saving FD, investments are eligible for tax deduction under section 80C of the Income Tax Act.
- Address your liquidity needs: Liquidity refers to turning your asset into cash. If she would have invested only in FD, to break an FD, a penalty would be levied on her. Since she now holds gold, turning gold into cash would be much easier than breaking her FD.
Check out the INVEST Tab on LXME app and look out for various time and goal-based portfolios which are diversified, well-researched, and curated by experts.
To summarize, the equity market volatility, can be worrisome, but it’s important to stay calm and stick to your investment plan, focus on your goals and avoid the market noise. It’s a good idea to check your portfolio every 6 months to a year. If you focus on long-term goals and spread out your investments, you can manage the ups and downs of the Indian stock market.
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