Have you ended up in a volatile market? Don't exit and stay on

It’s a strange time on the stock markets as investors would have noticed. The Sensex has risen to new heights in recent days. However, the mid-cap and small-cap indices are in bear territory. Small-cap stock and mutual fund investors have received a mauling in recent months. Incidentally, these were the two categories that had performed extremely well in the recent years. But what now? 

Use opportunity to make high quality buys
Investment advisors always tell you that the risk and rewards are the highest for mid-cap and small-cap investments. After a few good years, the mutual fund schemes that had delivered even 50 per cent returns in a year recently, have turned red in recent months. If this adverse experience has led you to rethink your investment choices, this is a good time to start purchasing high-quality equity. You can gradually start including more bluechips in your portfolio not just stocks but bluechip mutual funds as well. Bluechips being India’s leading companies can provide optimum long-term returns to meet your goals and they aren’t as volatile as mid-cap and small-cap investments. 

Use mutual funds slips  
The stock markets are a deeply confusing place for a novice investor. How does he pick from the thousands of companies available? When does he buy? How long does he hold? When does he sell? This is why it’s better for beginners to invest in equity via mutual fund SIPs. Not only is your equity investment portfolio expertly managed by the fund house for diversification, but you are also investing in a disciplined manner every month and averaging your costs with each purchase. 

Examine your investment choices
If you have suffered major losses through mid-cap and small-cap equity investments, you may want to relook why you had made the investment choices you did. An investment plan must help you achieve a target. Understand your own rationale for selecting the plan, and then decide if you want to stick to it or do something different to achieve your target. For example, you may have invested in a small-cap mutual fund scheme that has delivered -5% returns in the last six months. However, this may be a good performance compared to the small-cap index which has delivered -16% in the same period. This indicates that the scheme may actually be performing well, given the bigger picture.

Stay the course
Lastly, don’t chop and change your investment plans every few months. Rather, create a money goal, find the best investment instrument to achieve it, and stay the course. Periodic ups and downs in the market should not deter you from going towards your goals.

Good time to lower costs
A dip in stock prices is always a good time to make the same investments at lower costs. The same applies to equity mutual funds as well. This helps you make faster gains when the prices start climbing again. For example, let’s say you purchased 10 units of stock X at Rs 1,000. X fell 10 per cent, lowering your investment value to Rs 9,000. Here, you buy 10 more units at Rs 900. Therefore, your average purchasing price for the 20 units becomes Rs 950. When X returns to Rs 1,000, your total investment of Rs19,000 would appreciate to Rs 20,000. And though you haven’t gained from your first purchase, your overall investment in X is profitable because you used the dip to lower your costs.