Winning Strategy for a Volatile Market


Winning Strategy for a Volatile Market

Andrew L D'Cunha
Oct 10, 2011

"Market is crashing..shall I stop my Systematic Investment Plan?"
"Shall I redeem the funds invested in mutual funds?"

These are the common questions from the scared investors during market fall. Equities are nose-diving and investors are scared. From its 52-week intraday high of 21,109 points in November last year, the BSE Sensex, closed at low of 16,233 on Friday October 7th 2011., down by 23%. Financial markets all over the world are witnessing see-saw volatility. The wild swings in the market are eroding the confidence of investors. Many investors are tempted to sell everything and pull out of the market, accepting their losses. The truth is that most people ignore the most important factor in an investment – risk.

Stock market is a roller coaster that will take you upside and even downside. Investment markets move in cycles and it’s difficult to forecast when they’ll rise or fall. It's normal to be nervous when market is crashing. Investors should understand that when "bull market" sentiments drives the market to the heights in excess of what economic fundamentals warrants and market starts correcting itself to the level that can be justified on expectations of growth, sustainability and rates of return. Getting prepared well in advance will make you calm, steady and of course a winner. If you are 35 and investing for your retirement plan or for your 5 year old child’s higher education, brief market downturn should not derail your investment plan.


Why Equity investment?

Equities are a very simple asset class. Though due to market swings in short term equities can give negative returns, over a long run equities has consistently outperformed all the asset classes and generated wealth for the investors.. Investing in India stock market is like investing in the businesses of fast growing Indian economy. Every other asset class depends on money generated from companies (businesses). Businesses in India have grown at 15%-plus compounded annual growth rate (CAGR) and that’s why the Sensex has delivered 18-20% CAGR.. Economic growth prospects of India is very bright. Indian is second fastest growing economy in the world behind China. India should become one of the top five economies of the world in 5-10 years. India’s sustained economic growth, entrepreneurial society and young population have it poised to become an economic superpower within the next 15 years.

The more we understand the markets historical returns and volatility the better the investment decisions we are likely to make. The BSE index started on 31 March 1979 at 100 points and on 31/3/2011 closed at 19445 points. Yearly growth of 15-20% including dividend yield. During these 30 years time market has seen wars, natural calamities, scams, scandals, government change, terror strikes. If we look at the last ten years, the Sensex has given returns of about 18% compounded, which is from 2001 to 2011 and additional 1% to 2% of dividend yield i.e. about 20%. Of course, investors should also understand that fast performance is no guarantee of future results. Over the last five years, we have seen this market go to 16,000, fall to 12,000 or below 10,000 then go up all the way to 21,000, major slump to 8,000, and back to 21,000 followed by another fall to 16000.


GRAPH 1

Investing is like driving to reach a particular destination. Investors cannot reach the goal if they terminate their planned long distance journey, if they panic looking at the rough patches, potholes, ups and downs and blind turns and even bad drivers. Yes, investors have to be more cautious, but have to keep on going to reach our final destination. Long term financial journey is not smooth. They will encounter market volatility several times, along the way. We are on an economically bumpy road full of hurdles and shocks of various kinds such as liquidity, monetary, political, inflation, exchange rate, scams etc are disturbing the system.

"If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices" Warren Buffet in his 1997 letter to Berkshire Hathaway shareholders .

Since no one can predict how the markets will perform, it’s important to develop an investment strategy that can help you stay on the right track to meeting your long-term financial goals. Investment should be less emotional more methodical. Systematic Investment Plan is a fantastic way to even out volatility.


Power of Systematic Investment Plan

Investors can build wealth for long term if they consider volatility as their friend and make that friend work for you. Volatility really works to the advantage of somebody who is doing an SIP because he is able to capture several of these volatile movements in the markets place. He may not be able to do on his own, but a well managed mutual fund is able to do so because they are able to get the money and since the mandate is to be invested at all points of time, they go and invest on your behalf.

Growth from the investment can’t usually be achieved without exposing your investment some risk – being too cautious can also put your investment at risk. So getting the balance right is a key challenge to meeting your own investment objective. SIP is a tool which makes sure that what you save is what you invest. By investing you are participating in Indian growth story. India is on a solid growth path and volatility will remain given a political setup, dependence on the global economy and foreign flows, interest rate, inflation and the kind of changes that we keep seeing in our policy regime. India will remain a volatile market and SIP is one of the best ways to move forward. In volatile market when downturn is hard to predict, regular monthly investment can

• Provide smoother return
• Ensure you buy more units when market price is lower and few units when market price is higher, lowering the average price paid per units. Doing this enables you to take advantage of declines, while reducing your chance of making large financial commitments at the market's peak. Over the long term it may help you reduce the average cost you pay for units a level below the average price SIP best works to achieve your medium and long term goals; it may be building corpus for child’s education and child’s marriage , planning for retirement, planning for home etc.

Current volatility is an opportunity to enhance their SIPs, rather than stop or lower them. For an SIP to deliver the good returns, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, i.e. he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time. SIP’s are meant to eliminate market time. But investors must opt for a long enough SIP’ tenure so as to "time" the market downturn. It's not timing the market that will earn you the greatest reward. It's your time in the market that will create wealth.

High investment returns cannot be earned without taking substantial risk. Safe investments produce low returns The market crash of 2008 ended up as a great way of improving returns. What looked like the end of the financial world at one point actually delivered great returns for those who kept the faith and continued their SIPs throughout the low period.


Here is an example of Diversified mutual fund, its performance during market fall in 2008 and market recovery in 2009.

• Chart A: If Investor started his Systematic Investment Plan on 01.01.08 when Sensex was at peak above 20000 level with monthly investment of Rs. 10000 and terminates his SIP on 01.04.09.

Points to be noted from above data:

• Investor started his SIP on 01.01.08 when Sensex was at peak above 20000 level. Monthly investment Rs. 10000 and terminates his SIP on 01.04.09.
• Investor received less units 44.53 units at a rate of 224.59 on 01.01.08 when market is high.
• Investor received more units 103.92 units at a rate of 96.23 on 02.03.09 when market is low (Sensex at 8607).
• As of 01.04.09 investor accumulated 1164.55 units at an average rate of 146.51.
• As of 01.04.09 invested amount is Rs. 1,60,000/- and value of 1164.55 units at rate of 110.15 is only Rs. 128.125. If investor stopped his SIP investment and sold his units in panic he would have made a loss of Rs.31,875/-. Yearly return is minus 31.32%
• As of 01.12.09 value of 1164.55 units at rate of 227.75 is Rs. 265,226. Gain of Rs. 1,05,226/-
• As of 01.12.10 value of 1164.55 units at rate of 302.13 is Rs. 351,845. Gain of Rs. 1,91,845/-
• The point of maximum uncertainty is also equal to the point of maximum return. The value of 103.92 units purchased for Rs. 10000 on 02.03.09 as of 01.12.10 at rate of 302.13 is Rs 31,397 !


• Chart B: If Investor started his Systematic Investment Plan on 01.01.08 when Sensex was at peak above 20000 level with monthly investment Rs. 10000 and continued his SIP till December 2010.


• As of 01.12.10 investor accumulated 2070.46 units at an average rate of 193.11
• As of 01.12.10 value of 2070.46 units at rate of 302.13 is y Rs. 625,548. Invested amount Rs 3,60,000. Gain of Rs. 2,65,548/-. Return on Investment (Yearly) 41.66%
A good mutual fund can outperform Sensex by large margin. On 01.01.2008 when Sensex was at 20300 NAV of this fund was 224,59. On 01.11.2010 when Sensex was at 20356 NAV of this fund was 306.97.

Investors get more units for the same amount of money in falling markets. The units bought at lower price-levels will appreciate when the market turns around, adding to the overall portfolio value. SIPs have the potential to minimize losses and generate returns.

I have not given name of the fund here as being unbiased financial advisor I don’t want to endorse any product in web portal. The example is given only to make readers understand the power of Systematic Investment Plan in volatile market. Readers also note that mutual fund investments are subject to market risks. Mutual funds are not guaranteed return products. Past performance may or may not be sustained in future.


GRAPH 2



Long term SIP return of Diversified Multi Cap fund

CHART C


Rs 10000/- per month in this scheme for last 14 years, it is worth Rs 1.85 crores with annualized return of 30.8%.

I have not given name of the fund here as being independent financial advisor I don’t want to endorse any product on web portal. The example is given only to make readers understand the power of Systematic Investment Plan in volatile market. Readers also note that mutual fund investments are subject to market risks. Mutual funds are not guaranteed return products. Past performance may or may not be sustained in future.

Though the above SIP returns look very attractive, investor need to know that the journey would have been bumpy during the above period. Only long term investor with clear goal in mind can secure this return.

The right approach during all kinds of markets is to be realistic. Investors need to have a plan to reach their financial goal striking a right balance between risk and return. When market reaches to a particular point investors can reduce the risk of their portfolio by switching a part of funds to from equity to debt depending upon their risk tolerance.


Conclusion

Preparation, patience and discipline are important aspects of investment. Don’t allow your long term plans to get crushed by the market sentiments. Through SIP reduce your exposure to risk without reducing your exposure to equity. Be a winner by turning market volatility to your favour. Stock market is like sea which is forever changing. Sometimes calm, peaceful and sometimes chaotic with huge and violent waves. Surfers should adopt a strategy to ride these waves over and over again. Systematic Investment Plan is the best strategy to ride the market waves.


  

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Comment on this article

  • Amin Bhoja, kkuh / Riyadh

    Tue, Oct 11 2011

    Dear Mr.Alexander, You didnot catch my point.Each person have his own investment plan.I am not telling anybody SIP is bad,If it suits you, you invest .What I wrote in my comments, there exists risk in each and all investments.I am a equity investor, mutual fund investor and also investor in the properties but SIP not suits for my mind.Thanks
    Mr Andrews thank you for the comments, yes there exists risk in each investment.It is investor's choice which one he follows.Thanks

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  • Alexander P Menezes, Karkala/Dubai

    Tue, Oct 11 2011

    Dear Mr. Bhoja Amin,
    I am disappointed to see you comparing Mutual fund to LIC policy. I am sure you know the difference between the two. SIP is a systematic investment plan with a sole intention of saving for the future date( Retirement) offcourse to stay invested in a good return oriented and stable companies, where as the LIC is covering your life towards any untoward incidents so that your beloved family member whom you nominate, gets the financial assistance in the form of a lumpsum cash. If not,you will get the insured amount along with the accumulated bonus at the end of the term.
    As an investor, one wishes to invest in good yeilding companies and my advice for the investors to either seek the advice from an expert in this field like Mr. D'cunha or do his/her own research so that he/she invests in the good companies. SIP is one of the best investment plan for the working class, a step towards a compulsory savings. Kind Regards.Alexander P Menezes.

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  • Andrew L D Cunha, Mangalore

    Tue, Oct 11 2011

    Dear Mr. Amin. Thank you for your comment. I am not a stock broker. Regarding risk - If you go through the data given in Chart A, it shows how investor make a loss If he sells at low price when market is down. It also shows how investor makes a profit if he waits for recovery. Through SIP route investor can take advantage of market cycles and also they can control the emotions such as "greed" and 'Fear". Yes, while chosing funds investors has to be careful. It's important to understand that each mutual fund has different risks and rewards. Each fund has a predetermined investment objective. Investor should the type of fund that suite his investment needs and risk profile.

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  • Ganesh Kamath, Car Street

    Mon, Oct 10 2011

    Dear Andrew and all. I appreciate concerns and feedback over FnO and SIP, but word of caution here is that do not assume SIP is a sacro-sanct instrument. As evident from japanese or Nasdaq crash, markets havent recovered yet from their highs. These days when soverign risks are high, never beleive in buy and hold or buy and average as in SIP.... be swift, nimble and get 15-20% returns ( better than FD rate) within year from blue chip or exit at 5% stop loss (risk of equity investment) . On a different note, trading Futures and Options segment is highly recommeneded even for average risk taker, if one sticks to their stop loss positions religiously. The rewards are handsome...Options fetches you 50-100% returns for 1% rise/fall in markets and on other side stop loss can take off 10% risk... So I request to forum members, do not narrow down your focus to SIP...but look at trading derivatives also. Also, std disclosure is that past performance can or cannot repeat.

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  • Valerian Furtado, Mulki/Canada

    Mon, Oct 10 2011

    Investing in stock market either thru stocks or thru mutual funds by itself is a very high risk game.

    However its true that SIP is the best mechanism to invest.however its not risk free.Just check with the American or many western investor how much money they lost over the period of time even with SIP or may be with Japanese market where the index which was at 40000 points in the year 1990,is hovering below 10000 for the last 20 years. Its not easy to keep on investing in the falling market considering other variables of life like, children education, change of employment, health and other no of commitments and life's if's and but's.Further one has to have a lions heart not to encash in times of need.

    Finally why mutual funds who will eat away your cash with various percentage of expenses fees. why not simply invest in a ETF ( Exchange Traded Fund). With low fees you can still attain your goal.

    Mutual funds and stocks charts looks impressive when u see the historical chart but making a gain is lot of luck than skill, its like a stopped watch...which gives the correct time twice a day. Its important for the investor to know his risk profile and then invest.

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  • Agnello, Mangalore/Muscat

    Mon, Oct 10 2011

    Investing in a mutual fund which invests in shares of top 100 cos of India is like having a partnership with the top 100 cos of India.Your team of top notch excecutives in these companies will see that you get best possible returns on your investment.Your risk will be as much as the risk top 100 cos would have.
    If I were to open a business of my own I wouldn't be thinking of return on my investment tommorrow but may be in next five to ten years .
    Trading meanwhile is betting on valuation of these companies as the market tries to find optimum value for company. If you are caught on the positve side of the swing you make money, if you are on the negative side you loose. The higher the volatility the higher the swing and higher the gain or bigger the loss.

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  • Amin Bhoja, kkuh/ riyadh

    Mon, Oct 10 2011

    Dear Andrew,are you a stock broker.When i saw your article it reminded me a LIC agent who gives all the positive details and forget give you the negetive one.About mutual fund,only some funds are doing good, so it is not advisable to follow all.About equity investment it is some time purely defends on the local and international situations.Good experience is a advantage in the equity investment.It is a good article for the fresh type of investors.My advise to all,if you have enough money please try to invest in ed properties which will give you good benefit and less risk.

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  • Alexander P Menezes, Karkala/Dubai

    Mon, Oct 10 2011

    Dear Mr. Ganesh Kamath, there is a difference between you and target population which Andrew is suggesting the SIP. The day trading may be your full time job, but people like me who are employed in the Gulf, need to think in the direction of systematic savings. I am sure most of our population in the gulf, their earnings are not efficiently sent to savings due to various commitments here in the gulf and back home. What Andrew is suggesting is a paltry sum of Rs. 1000 to Rs.10000) Depending on one's earning ability) should be kept aside through SIP so that these monies can be invested in the high yeilding funds so that these investors can benefit from the market downturn by actually accumulating more units and like you, expect the market to go up and make good returns. Your daily trading is a specialized job and you need to have a very good knowledge of the local market trends, whereas most of the people here in the Gulf leave home at 5 AM and come back home by 9 PM on a typical working day. Life is tough here in the gulf and for all these hardships that they are going through, they need to keep something aside for the better tomorrow or a rainy day.
    That is why Andrew is suggesting a systematic investment plan for 15 years so that when you return from Gulf you will have some sort of savings to do the Day trading sitting in Mangalore and earn a 30% plus return like you do.

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  • Andrew L D Cunha, Mangalore

    Mon, Oct 10 2011

    Dear Mr. Ganesh. Thank you for your comment. The average investor just does not have the time or experience needed to make informed and profitable decisions. Basically it comes down to what investors goals are. If you are expert and want to make money, futures and options is interesting strategy. I have not suggested futures and options because most of the investors does not have time and skill to do trading. The main advantage of SIP is discipline. Average investor can "create wealth" for long term through disciplined investment.

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  • Ganesh Kamath, Car Street

    Mon, Oct 10 2011

    Dear Andrew... I am day trading stock options and futures and the kind of return available is 30% in a single day...Why do you suggest a SIP for 15 year period for high risk investors when they can make similar returns if they are willing to accept higher risk..

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  • nithin, mangalore

    Mon, Oct 10 2011

    dear roshan,derebail/dubai
    im with u.. roshan ..y because before imalso join the mutual funds..but every time i lose my money...

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  • Roshan, derebail/dubai

    Mon, Oct 10 2011

    don't invest whole savings in mutual fund. days are gone one can become richer through mutual funds.
    just think that its a part of your investment same like FDs. old records which shows huge profits in mutual funds are just records for reference.be wise but don't oversmart.

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  • Antony Menezes, Pachanadi/ Kuwait, Bondel / Kuwait

    Mon, Oct 10 2011

    Hi Andrew, Really this is a very good article and you gave good advice on how to save some money for the future.
    Mr. Andrew is my finacial advisor and he is clearly telling what to do and what not to do and how to make profit through investing in good funds through SIP. He is good and polite person to deal with any kind of finace advice. Iam requesting those people those who not yet started the SIP kindley meet Mr. Andrew ASAP. and this is the right time to invest when the market is down
    Thank Mr. Andrew for all your good service .

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  • Agnello, Mangalore/Muscat

    Mon, Oct 10 2011

    Investing in market can give you good returns through mutual funds and SIP is a good tool to average out any risks as Andrew clearly explains with all the examples.
    Diversified funds, multicap funds , balanced funds and income funds should be used in proportion to ones age and risk profile. Avoid sectorial and single cap funds as one my need to time them properly .
    As an employed person it is important to obtain sound advice from a good financial planner to do this.

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  • Edmond Noronha, Kirem-Sharjah

    Mon, Oct 10 2011

    Dear Andrew

    You are doing a wonderful job. Why didn't you meet me in 1997? and explain me this.

    All the best to you and to your social responsibility.

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  • henrita, mangalore

    Mon, Oct 10 2011

    I wish u all suceess. All the best WINWIN TEAM.

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  • Alexander P Menezes, Karkala/Dubai

    Sun, Oct 09 2011

    An excellent and elaborative article on Financial saving habits by Mr. Dcunha. I urge on those who are in the gulf to atleast now adopt to a systematic savings plan and reap the benefits of SIP savings and investments at a later date. Its not difficult and you will be glad that you got in to this habit of investing in the Market. Start with a target of saving Rs. 5000 monthly and gradually increase it as per your abilities. Get in touch with Mr. Andrew D'cunha ASAP and rest is easy.

    Thank you Andrew D'cunha for writing this article for the benefit of Daijiworld readers.

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