Wednesday, May 9, 2012

What to do in the Indian Stock Market - Amidst this Carnage


The Indian Stock Markets have bled heavily over the past few days. Economic Uncertainty in the Global Markets, Carnage in the markets in other countries and sudden/surprise taxation moves by the Indian Government all together have drowned the Investor Population in India in Deep Sorrow. The purpose of this article is to take some decisions on what to do as of now "As a Normal Investor"...

Before we begin, let us take a look at what happened in the Stock Markets yesterday - 8th May 2012.

Markets in India:

The Markets in India continued their Downward trend and fell by over 2%. All stocks - Large Caps, Mid Caps & Small Caps alike fell and some of them very heavily. The Exact Opening & Closing Values with how much they fell for the various Indices in India are as follows:





































Index Open Value Close Value Change % Change
Nifty (NSE) 5114.2 5000 -114.2 -2.2%
Sensex (BSE) 16912.7 16546.2 -366.5 -2.2%
BSE Midcap 6132.6 6053.9 -78.7 -1.3
BSE Smallcap 6608.35 6550.82 -57.53 -0.9


Note: Data Accurate as of End-Of-Day 8th May 2012.

Global Markets:

The Scenario in the Global Markets wasnt much different either. The Eurozone Crisis, uncertainty in USA etc have dragged the world indices down for months now and yesterday was no different. All the major global indices in USA, Japan, UK, Hong Kong & Singapore ended lower than their previous day close. The fall ranged from 0.4% to 1.8%. The Exact Opening & Closing Values with how much they fell for the various Indices are as follows:



















































Index Open Value Close Value Change % Change
Dow Jones (US) 13008.5 12932.1 -76.4 -0.6%
Nasdaq (US) 2957.8 2946.3 -11.5 -0.4%
FTSE (London) 5655.1 5554.6 -100.5 -1.8%
Hang Seng (Hong Kong) 20484.8 20313.3 -171.5 -0.8%
Nikkei (Japan) 9181.6 9063.9 -117.7 -1.3%
SGX Nifty (Singapore) 4985 4965.5 -19.5 -0.4%


Note: Data Accurate as of End-Of-Day 8th May 2012.

What to do Now?

This is a million dollar question and is not something that can be answered in a single word. What to do now depends entirely on who you are and what your risk appetite is. So, let us classify our Investory Population in India into various categories:

1. Super Aggressive Investor (Very High Risk)
2. Aggressive Investor (High Risk)
3. Moderate Investor (Medium Risk)
4. Conservative Investor (Low Risk)


Let us take a look at how these categories of Investors must approach the Stock Markets in India.

1. Super Aggressive Investor (Very High Risk)

Who They Are? - These are the Class of Investors who are young and energetic (Usually in their Late 20's or Early 30's) who earn a handsome salary and can afford to take a bump or two in the Stock Market. They invest only the surplus they can afford to lose and hence are willing to take very high risks.

What They Can Do? - The Market Valuations for some of the best cos in India like Reliance Industries, ICICI Bank, State Bank of India, TATA Consultancy Services etc are very attractive. Because of the carnage in the stock markets right now, these cos have fallen in price heavily. As these guys can afford to risk further downfalls, now would be a good time to start accumulating these blue-chip gems. This downfall in the market is not permanent and in the next few months, the markets will definitely recover and once they do, these guys can make a good profit.

An important point to note here is that, the investments must not be done in one shot. The shares must be bought in a staggered manner to average out short term volatility in prices. For ex: If you intend on buying 1000 shares of ICICI Bank, split up the purchase across weeks and buy lets say 200 shares every week for the next 5 weeks.

2. Aggressive Investor (High Risk)

Who They Are? - These are the Class of Investors who are young and energetic (Usually in their Late 20's or Early 30's) who earn a handsome salary and can afford to take a bump or two in the Stock Market. They invest only the surplus they can afford to lose and hence are willing to take very high risks. However, these guys are not willing to take as much risk as the super aggressive investors and hence would like to play it somewhat safer in comparison to the aforementioned category.

What They Can Do? - The advise is the same as for the Super Aggressive Investors. This is the right time to enter the Stock Markets. However, buying individual stocks is extremely risky. Instead, these investors can cherry-pick the best performing Mutual Funds in India and invest in them. This way they get the best of both words. By entrusting the job of selecting the best shares to buy & sell with an experienced fund manager, the risk part is considerably reduced. However, when the markets rise in future, these MF's will give handsome returns which is a win-win kind of scenario.

3. Moderate Investor (Medium Risk)

Who They Are? - These are the Class of Investors who are in their Early or late 40's. They are nearing Retirement and have children who are approaching the age where they have to be sent for higher education. At this stage, they do not wish to take huge risks. However, they want to have exposure to the Stock Market so that they can capitalize on the high-returns aspect of the Markets.

What They Can Do? - They can split up their investment into two. 60% must be dedicated to Fixed Income Instruments like Bank Deposits. The Remaining 40% must be split up and invested across 2-3 well performing Equity Mutual Funds preferably with atleast 1 Balanced Mutual Fund scheme. This way, around 60% or more (If we consider the debt portion of the Balanced MF Scheme) is going to be safe while the remaining amount can grow then the Markets rebound.

4. Conservative Investor (Low Risk)

Who They Are? - These are the Class of Investors who are in their 50's and are very close to Retirement. At such a scenario, they cannot afford to lose their nest egg to Market volatility. So, safety is their paramount concern.

What They Can Do? - They should essentially stay away from the Stock Markets as of now. If they do wish to have market exposure, they can invest a max of 10% of their portfolio in the Markets. This must be split into two and one must be in a Equity Diversified MF and the other in a Balanced MF. This way more than 90% of their portfolio is going to be safe and there will be a bonus if the markets rebound in the future.

Important:

The Risk Classification above is broadly based on age. You can be only 30 years and old and still do not wish to take as much risks as the Aggressive or the Super Aggressive Investor. The above is just a rough guideline. You can choose to model your investments based on what category of Investor you are.

Happy Investing!!!

Disclaimer: The author does not recommend buying any of the shares mentioned above. They are just for illustration purposes only.

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