Equity investing: Gear up for near-term volatility in equities


Last year was great for equity investors. Thus, investors should approach the market through multi-cap funds to capitalise on opportunities and optimise returns.

The year 2021 will remain unforgettable for the equity market. Sensex and Nifty touched new highs, record number of Demat accounts opened, and IPOs by 63 firms were floated, which raised ₹1.19 lakh crore.

There was an indication of a broad-based rally as BSE Sensex gained 21%, while BSE Mid-cap gained 38% and BSE Small-cap gained 61%.

But it came down its star stairway in the last two months by 10%, because of factors such as Fed’s policies to Covid variant.

With China continuing its economic policies and stable macroeconomic parameters, India will be an attractive market for equity investment. With continued economic recovery and strong earnings growth, Nifty could deliver 12-15% returns in 2022.

After this, the Nifty is trading at 20x 12-month forward PE. Some factors pull the market back. But in the long-run strong earnings delivery and positive macroeconomic data will help drive the market upwards.

Everything this year is not going to be rosy, as the market volatility is expected to increase, caused none other than by the Fed’s end of easy money policy and also the anticipated raising of interest rates, which will make FIIs invest in low-risk assets.

The other threat is the pandemic and the latest variant, which could severely affect the recovery. The GDP growth numbers do not reveal the real economic condition of the nation. Investors should find an appropriate way to ride out this volatility.

Ideally, their portfolio should be an asset mix. In this, there should be investments in large caps for a higher margin of safety. Investments should also be in the mid and small-cap for higher growth opportunities.

That will help to counter the volatility and boost returns.

For mutual fund investors, focus should be multi-capped with diversified investments in stocks across sectors. It will capitalize on opportunities across market caps, which will generate optimal returns for investors.

If a fund manager spots an opportunity in mid-cap and small-cap segments, more funds are allocated towards it making it a high-risk high-return investment proposition.

This approach will face higher volatility in the short term and will take five years or more to gain returns.

Thus, investors must select funds with strong track records and must be diversified across investment styles. If they cannot choose one, then invest in passive funds that reflect the index returns.

Investors, especially retail investors, should not be terrified by the near-term volatility. They should go for optimum equity allocation as per their long-term financial goals.

It can help steer near volatility in different asset classes and gives the best results for the long term.

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