Budget
has neither given direction to economic growth of the country nor has also
attempted to restore the confidence of the investors in stock market. Even
though there is announcement of reduction of 20% in STT for delivery of shares,
we have witnessed selling pressure in the market and this is likely to continue
for some time looking at present economic conditions. Hike of 2% in service tax
and excise duty will also add to the negativity in the market. BSE sensex has
again broken the important level of 17,000 marks and this volatility is likely
to disturb and confuse the investors. Investors have either stopped investing
in equity or have made withdrawals from equity investment. Mutual Fund schemes
are also facing redemption pressure.
Some people have discontinued their SIPs in equity schemes. This
volatility in the market will once again force people to play safe and park
their hard earned money in Insurance, F.D.’s and small saving schemes, which
are unlikely to beat inflation.
The
RBIs recent announcement of repo rate cut of 50 bps has also failed to boost
the sentiment of the market. Looking at present economic and political
conditions in India, it is for sure that this volatility is likely to remain
for some more time into the future. There are both internal and external
factors confirming the same trend.
1) Crude
oil price is still hovering above $ 100 per barrel which will not ease the
inflation pressure.
2) Rupee
has again crossed high of 53 against dollar and experts predict that it may
touch 55 in coming months.
3) The
GDP growth forecast for year 2012-13 is 7.6% but experts feel that it may go
below 7%.
4) The
situations in USA and European markets may lead to more selling pressures from
FIIs.
5) Budgetary
deficit is also an area of concern and
we have to see how the disinvestment targets are met
6) We
have not seen major economic reforms in the UPA II regime. The Government has
missed this opportunity while presenting the 2012 budget.
7) The
next budget is likely to be populist budget looking at the fact that the general
elections are to be held either at the end of 2013 or early 2014.
8) Loss
of congress in UP and other major states will force them to compromise on
economic issues.
9) There
is lack of political will and unless we see major reforms volatility is likely
to continue.
Than
what should average investors do in the current market situation? Before coming
to solution one must try to understand equity as an asset class before
investing. You cannot expect overnight profit from equity. You must invest as
per your asset allocation. Your time horizon for investing in equity should be
more than 5 years. You must also review your investment portfolio periodically
and rebalance the portfolio. Never try to time the market and “always stay
invested is the success mantra” for investing in stock market. If you
understand the basics than this volatility in stock market will never affect
you. Equity has always out performed against all other asset class in the
longer run. One can expect 15% plus return from equity, which the equity has
already delivered over long period.
SIP in mutual fund is the best solution for investing in equity
for the long term in a volatile market scenario. By investing through SIP you
reap the advantage which is known as rupee cost averaging. , This lowers the
average cost of your holding. Secondly if you invest through SIP, you do not
have to worry about daily volatility of the market and thus do not have to time
the market. Since SIP can be done with
as small an amount as five hundred rupees you can start with a small saving
also and get the advantage of power of compounding.
It is also advisable to get a financial plan made from
professionals who is not bundling the same with execution. The financial plan
will tell you which of your investment is long term and which is short term.
Once you are confident that your investment is for longer period of time, this
volatility will not affect your decision to continue your investment and SIPs
in equity.
This article first appeared at myiris.com on 7th May'2012.
