Investment strategy: how to overcome volatility and inflation
Over the past five trading sessions, the benchmark Sensex has lost nearly 3,000 points due to likely aggressive rate hikes by the US Federal Reserve, rising inflation, fourth quarter earnings plus lower than expected and the surge in Covid-19 cases in parts of Europe and China. Also in the debt market, the yield on benchmark 10-year government securities rose to 7.16% on April 18 from 6.46% on January 3, and the Reserve Bank of India, in its review of the monetary policy of April 8, signaled that its objective is now shifting from reviving growth to controlling inflation.
Consumer price inflation hit 6.9% in March, a 17-month high and remained above the central bank’s tolerance limit for the third straight month. The wholesale price index accelerated to 14.5% in March from 13.1% in February. Experts expect the RBI to start raising interest rates soon and the amount of hikes will depend on inflation footprints. In such a volatile market, experts advise individuals to lower their expectations for equity returns and keep asset allocation in place. They should consider investing in quality stocks during downturns, investing in floating rate funds and target maturity funds in fixed income securities, and gaining some exposure to exchange traded funds on the market. ‘gold.
A market correction is the perfect time to buy quality large-cap stocks, especially companies that are posting good numbers. Although mid-cap companies offer good buying opportunities, investors should examine company fundamentals and cash flows. VK Vijayakumar, chief investment strategist at Geojit Financial Services, says a clear trend in the market is the preference for value over growth. “This trend and the outperformance of mid caps should continue. Investors will have buying opportunities in these declining segments,” he says.
Vineet Bagri, managing partner at TrustPlutus Wealth, said if there were further declines this week, sentiments would worsen further and risk aversion would rise given the earnings season hasn’t started on a high. good mark. “Nevertheless, we suggest buying slowly and steadily during dips, especially for long-term investors, and not turning away from the market altogether,” he says.
Debt: target maturity funds, floating rate funds
Target maturity debt funds are suitable if the investment horizon matches the target date. If a rise in rates occurs, there will be an impact on the market value of these funds. However, if you hold them to maturity, the returns would be almost similar to the return to maturity, as volatility tends to decrease the closer the fund gets to the target maturity.
In the event of rising interest rates, investing in floating rate funds will offer less duration risk than longer term fixed income instruments. Experts say that in a rising interest rate environment, floating rate funds could generate higher returns than other fixed income funds because a floating rate fund’s returns are tied to the rate of interest. reference interest.
Diversifier: ETF on gold
Investing in gold is a good way to diversify, acts as a hedge against inflation and mitigates losses during difficult market conditions and economic downturns. Gold ETFs recorded net inflows of 205 crore in March after recording net outflows for two consecutive months. Gold ETFs offered by mutual funds are a cost-effective option for buying the metal electronically.
- A market correction is the perfect time to buy quality large-cap stocks
- Target maturity debt funds are suitable if the investment horizon matches the target date
- Floating rate funds can generate higher returns in a rising interest rate scenario
- Gold is a good diversifier, helps hedge against inflation