Volatile Market

Volatile market: Invest at every dip

We have seen the markets going up almost 50 percent from the level of June 2006. The main reasons of this sharp rise include fresh funds inflow from foreign investors, strong results by Indian companies and positive sentiments of investors. On one side people who invested in the stock markets have made good profits, and on the other side, there are people who are waiting for the market to correct in order to make fresh investments.

We have seen correction in the stock market in the last few days. The trigger of this correction was the news of the Reserve Bank of India (RBI) increasing the cash reserve ratio (CRR) for banks. Correction is a healthy sign for the stock markets and it was well anticipated this time, given the strong run-up seen in last few months. As far as market fundamental is concerned, nothing much has changed from last few weeks.

If we analyse the recent CRR increase by RBI, we see that one of the main objectives of RBI is to contain the inflation rate within an acceptable range. Foreign investors have pumped in a lot of fresh money into Indian markets in the last one year. In order to check the foreign exchange rate fluctuations, the RBI had purchased these extra dollars available in the market.

As a result the money supply has gone up in the market. This resulted in a situation where a lot of money was chasing fewer goods and hence a rise in inflation. With increase in the CRR, the RBI is trying to reduce this excess liquidity in order to contain the inflation level.

We cannot rule out further volatility in the markets in the short term, but the market bullishness seems intact for the medium and long-term perspective.

Global markets are more or less stable. Crude oil prices are stable and trading in the range of USD 60. Indian companies have delivered good results in the past few quarters and there are no reasons to believe that they will not deliver good results in the coming few quarters.

Usually, it is advisable to take a medium to long term horizon while making investment decisions. Market rallies and corrections are a usual phenomenon. If you are invested in fundamentally good stocks, it is advisable to remain invested.

The last thing one should do in such type of market is to sell/buy the stocks in hurry. It is better to take a look at your portfolio and cautiously take decision to cut down the loss or invest more to average out the buy price.

The last thing one should do in such type of market is to sell/buy the stocks in hurry. It is better to take a look at your portfolio and cautiously take decision to cut down the loss or invest more to average out the buy price.

Remember one point, trading stocks involves transaction cost and also if you exit from a stock, it may not be easy to re-enter at a lower price (the stock may not go down or you may keep on watching for lower price to re-enter).

For those planning to invest

It is very difficult for anybody to time the market (peak or bottom), so the best strategy will be to invest at every dip. Based on your investment profile, identify a portfolio of stocks, usually 5-8 stocks and start investing in small percentages every time markets go down.

Market corrections are buying opportunities in quality stocks. In the preface to 'The Intelligent Investor' by Benjamin Graham, Warren Buffett says, "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information.

What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework". If you can strengthen your resolve and stay the course regardless of popular opinion, analyst views and technical targets handed out daily, you will be able to get good returns on your investments.

Markets have seen many ups and downs over the years. These are caused by various macroeconomic factors like inflation, interest rates, recessions and business cycles. India's domestic demand for equities is small compared to the money muscle of the foreign institutional investors (FII). So they are in a position to take the markets to very high levels when buying into Indian stocks or bring down the markets if they sell some of their holdings. So FIIs can be added to the list of factors causing the macroeconomic dance in the Indian stock markets.

Universitatea Transilvania, Facultatea de Stiinte Economice, nota 9