This year the Nifty 50 declined 1.81%. Being election year in India, even the volatility in the markets have also increased as it is uncertain whether the ruling government would continue in next term also. So, as a result Foreign Portfolio Investors [FPI] have started to shift their investments to China. Meanwhile, the Hang Seng is by 13.86% in the same period.
Now in Indian markets many are of view that there is bubble created in the market, some experts have also speculated about a possibility of a scam.
What is it? Why the markets are so volatile this year? What should be do to safeguard ourselves from market volatility? Will the markets fall further [ below 21,800 of Nifty 50 levels]? Let Let us find out.
Why is the markets are highly volatile?
As we all are aware, this year is an election year in India. Based on the past trends, whenever the existing ruling party continues for next five years the stock indices start a huge rally. In fact, in some election the Nifty hit the upper circuits three times when the election results announced the continuity of the ruling party.
The markets react this way because of reasons like, they might have invested in confidence of proposed policy and project implementation of the present government, when the ruling party changes they might fear whether those policies and projects would implement it or not; or uncertainty about the new ruler, etc.
Based on the opinion poll data, it was expected that the present government would continue for the next term. Now the investors are uncertain because of decline in voting percentage this time. Many people did not vote according to news reports. So they fear will the present government be able to manage its position.
This fear was reflected in the India VIX, as it spiked around 60%. Hence the markets in India are volatile.
Why are some FPIs shifting from India to China?
The reason is, the Chinese markets look very attractive in terms of valuation. Moreover Hang Seng has delivered 13.86% returns on a year to date basis. This increased the investor confidence.
But once the volatility in Indian markets reduce, probably even our Nifty and Sensex might give a stellar returns. But thus is just an expectation and it is not certain to happen this way.
What is the bubble in the markets that experts talk about ?
In the broader markets there are some small caps, where the promoters or other bulk investors try to manually hike the stock price. They just purchase in huge quantities which result in increasing stock prices. They might even spread false information about the company to develop interest. Common people who are in stock markets might mistake this hike in stock price as an indication that the stock might be multi bagger!!! Since they are beginners they might not be aware of it. They purchase it. This leads to further rise in stock price.
Once the stock reaches a particular level these promoters will sell their shares and exit the market. Now the common people suffer.
But this usually happens in small and micro cap stocks. That's the reason why many investors suggest to invest in large and mid cap stocks. It is not wrong in investing in small cap, if the investor is aware of history of promoters and should check out the past performance and good fundamentals.
So that's the bubble which the experts talk about. In fact some experts have also opined that, it is not a bubble but just a froth in the markets.
What should we do to safeguard our portfolio from market volatility?
1. Gold ETFs and SGB:
Whenever the stock markets become volatile investors usually shift a huge portion of it to gold. Even if the Nifty does not provide, they believe gold might provide returns as it considered as safe-haven asset. Even experts have suggested to accumulate gold at levels of Rs. 6,800 and below.
But the best way is to purchase gold ETFs [like Gold bees]. This is a cheap and best method to invest in gold. If you have huge money and patience to wait then investing in Sovereign Gold Bonds [SGB] is also an effective way.
Some investors even believe investing in gold stocks also as good investment option.
2. Increasing positions in certain large and mid caps :
However concentration of investments in one particular asset is always risky. So another way to tackle the issue would be, to invest in large caps having growth potential like HCL company and mid caps that have strong fundamentals and the stock prices are less volatile. This helps to hedge our portfolio to an extent.
3. Diversifying our portfolio in gold, bond and blue chips:
When it comes to investors having a huge portfolio of 5 lacs and above, it is best if they consider to take a huge sum from stock markets and invest certain sum in bonds, gold and continue to hold shares that are less volatile and fundamentally strong like ITC.
4. When more than 30 to 40% of returns given by the stock:
When the stocks that we hold have given stellar returns it is best to sell them and consider reinvesting only the principal used previously in the same stock. For example, if a person has bought 100 shares of company x at a price of Rs. 100 per share. So he has invested Rs. 10,000. Now if the current market price is 130 Rs. or Rs. 140 then the current value of investment will be Rs 13,000 [if the share is Rs.130]. Now the investor should take Rs. 3000 and invest the principal Rs.10,000.
This is considered to be an intelligent move in a volatile market.
Will the Nifty fall further?
According to news reports the markets have already come to over sold region. So if that is the case it is hard for the Nifty to fall at a greater extent. However nothing is certain. Since the India VIX is high the markets might be volatile for short term.
Disclaimer:
Dear readers, do not take any buy or sell decision of your investments based on this blog post alone. I request you to do your own research or consult a SEBI registered advisor before investing in any stocks or other assets or any other means.
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