Making volatility work for you in the long run

Making volatility work for you in the long run

 

If you see a crisis brewing again, remember it’s time to focus on the distant horizon and invest in equity mutual funds

The solution to the Greek situation, which had been keeping the world’s stock markets on its toes for some time, was well-accepted by the global markets as prices of equities rose across geographies. The austerity measures imposed in the bailout deal has been passed by the Greek parliament too and the good news for Greece is that banks will open soon.

The Greece crisis has been going on for some time now, but it was unlikely to cause major trouble to financial markets. The issues that plagued the Eurozone when the first crisis hit some years ago, is not the same as the current one.

Back in 2012, private institutions held Greek debt at the time the crisis unfolded, but this time it is public institutions such as International Monetary Fund (IMF) and European Central Bank that hold these debts. So there was not going to be any major chaos. Secondly, euro zone countries have improved their macro-economic positions and are in better shape.

The crisis did affect the Indian market, and for a limited time stocks prices turned volatile. However, we believe volatility is an opportunity to buy. These volatile periods seem a good time to grab a good slice of financial assets such as equity and debt mutual funds.

Such bouts of volatility are inevitable. Given that the global economy is more intertwined than ever before, where ever there is a crisis, the first reactions in the global markets are not always pleasant. After the number crunching, and worst case scenarios are analyzed, the markets then begin to stabilize.

The good news for India is that we can now focus on the growth and recovery in India rather than worry about events that are unlikely to have an impact here in India. So, if we can keep the long-term focus in mind, especially when the Indian macros seem favorable, we can have a good investor experience over time.

Macroeconomic fundamentals have improved from 2012-13, with reduced external vulnerability (the current-account deficit is less than 1.5%), lower fiscal deficit and benign inflation. The recent Wholesale Price Index again came in at -2.4%, and has been negative for eight months now.

Oil prices have come down further after the Iran nuclear deal which reduces India’s import bill further and save precious foreign exchange. It also spurs economic activity as spending begins to increase in other areas.

Amid all this, the Indian equity market has proved resilient despite global market volatility, and has risen 6.23% in one month, and the S&P BSE Sensex has crossed the crucial 28,000 mark.

The earnings season is on us. This quarter may come in muted as commodity prices have been falling and the demand growth has not yet picked up. We have seen some good news coming on this front which said that the number of stalled projects has been falling.

The Indian economy is in a position that is likely to see mutual funds deliver a good investor experience in the next three-five years. Remember, negative market reactions, whenever there is an international or domestic crisis, are more likely to prove to be good time to buy equity mutual funds.

We have seen how the global markets have recovered, and how the Indian markets have particularly been resilient and rebounded sharply after the news of the crisis. Quite a few people were sitting on the sidelines during the equity sell-off and are now ruing the fact that they missed an opportunity to accumulate equity assets.

Hence, we would nudge you to follow the mantra of buy on volatility. Investors with a medium-to long-term view need not worry about the Greece crisis, Yuan devaluation or any other crisis.

Happy Investing