Welcome, correction

A dip in the market is an opportunity if you have missed out on the action earlier or even to rejig the portfolio.

A falling stock market has few takers. On April 26, when the Indian stock markets felt the first tremors of the Greek crisis, many experts started predicting a correction.

Since then, the Bombay Stock Exchange Sensitive Index, or Sensex, and the CNX Nifty have already fallen over 4 per cent in the last nine trading sessions. Investors, obviously, are unsure of the magnitude of correction or if there will be one at all.

This is quite similar to last March, when the Sensex was languishing at the 8,000 level, most people were uninterested in putting in any fresh money.

There were reports that the number of folios with mutual funds fell sharply because even systematic investment plans (Sips) were not being renewed. As a result, in the turnaround that followed, many investors missed out.

Hemant Rustagi, chief executive officer, Wiseinvest, sums up an investor’s psyche and says, “Investors are always in a dilemma. They want the market to go up for existing investments, but want it to fall to make fresh investments.”

For a value buyer, one share of Reliance Industries (RIL) was available at Rs 859.15 (52-week low) on July 13, 2009. The scrip closed at Rs 1,010.90 on Thursday – almost 15 per cent more expensive.

For different kinds of investors, a falling market presents different opportunities.

The first timer: For those who have not entered the market, a falling market is a wonderful opportunity to start investing in a portfolio of stocks as well as in mutual funds, and at a much cheaper price.

Says VK Sharma, head (private broking & wealth management), HDFC Securities, “For those, who have missed the boat, a correction is a great opportunity to get stocks at a lower value.”

However, financial planners are more cautious. They feel that first-time investors should look at equity diversified funds initially. This allows them to have a slice of the entire market.

If you are starting out, try out a mix. Say if you have Rs 1 lakh to invest, you can put Rs 50,000 in equity diversified fund.

Also, depending upon you regular income flow, start two-four systematic investment plans (SIP) of Rs 5,000 each, one could be an equity-linked saving scheme that will give you tax benefits under Section 80C. Use the rest to buy some blue chip stocks.

Another strategy could be moving money through systematic transfer plans (STPs). Said Anil Rego, chief executive officer, Right Horizons, a financial planning firm, “When markets are falling, buy in tranches at different index levels by way of STP. In case of a sharper fall, move higher amount of money and quickly.”

Already in, but entered at a high level: Corrections are great opportunities for them. Most people enter the market during a bull run. For example, between July and December 2007, the Sensex rose from 14,800 to 20,200 levels – a rise of 38 per cent. During the same period, equity mutual funds collected Rs 59,601 crore. Clearly, investors feel more comfortable in a rising market.

Once the market corrects, they are a nervous lot. And, that is primarily because of the value of their shares fall sharply. But, they could look at cost-averaging. That is, buying the same shares at a lower price to reduce their holding cost. Importantly, SIPs should be continued for the same reason because you get more units for the same installment.

A word of caution though – if you own cyclical stocks, it is important to do proper research. “If there is a stock in the portfolio that is dependent on commodity cycles, be careful with the cost-averaging strategy,” added Sharma. For instance, there are expectations that reduced demand from China will adversely impact commodity prices in the coming days. As a result, related companies could suffer. Here, a cost-averaging strategy could go for a complete toss.

Well-diversified portfolio: A correction is an opportunity to move money. If there are dud stock as or some non-performing funds in the portfolio, which have not performed in the rising market, you can move money from them to better stocks and funds. Similarly, if you have overexposure to some sectors, prune it.

Investing in stock markets is not a cakewalk. There will be dips and rises. But overtime, a patient investor will surely be able to make money.

Source: Business Standard