How to Invest in Volatile Markets

Almost three months have now passed since the long-term capital gains tax on equity investments was re-introduced in Budget 2018. Up until then, everything seemed hunky-dory at the stock markets. But then, things turned awry.

Apart from the LTCG tax, global markets have also not been favourable. Since the beginning of February, Sensex has fallen by (-)4.31% while Nifty has been down by (-)4.20%, as on 20 April 2018. What could have been impressive returns for FY2017-18 have turned non-so-impressive because of the volatility seen in February and March. For FY2017-18, Sensex and Nifty returned 10.86% and 9.69% respectively.

Sure, the stock markets are volatile. But equity still remains the best investment option to create long-term wealth. (Read our detailed story on how equity beats other investment options like real estate, gold, FDs and PF.) The fact of the matter is that you cannot not invest in equities.

Buying opportunities in volatile markets

Typically, a volatile market gives you a great chance to buy stocks at reasonable prices. Stock market experts and mutual fund managers believe that a volatile market will give you plenty of excellent buying opportunities in stocks that you can hold for the long-term.

But the question still remains–Which are the stocks that you should invest in to ride out a volatile market?

You want to invest at lows, but you also want to ensure that your portfolio is not hurt by the volatility. In such a scenario, the best thing to do would be to invest in good quality low beta stocks.

Countering market risks

Beta is a measure of risk. There can be numerous stocks that belong to quality companies that are expected to do well, but if that stock is also a low beta stock, then you can achieve growth without assuming high risks.

The risks we talk about here are market risks. A stock faces two types of risks–market risk and company-specific risk. While the former affects all sectors and industries, the latter’s effect is limited to just one particular company. You can account for company-specific risks by diversifying your portfolio of stocks.

On the other hand, market risks cannot be eliminated. An event like the re-introduction of the LTCG tax is a market risk that affects all companies across sectors and industries. Market volatility comes from such market risks. The best way to counter such risks and volatility is by investing in low beta stocks.

Investing in low beta stocks

The stock market’s beta is considered to be 1. Any stock with beta of less than 1 would be less volatile than the market. If you can find quality low beta stocks, you can ensure that your portfolio will not be susceptible to the volatile markets.

These are the kind of stocks that the Safe Haven smallcase is made up of. As the name suggests, the smallcase is a relatively safe place to invest your money when the markets are particularly volatile.

All stocks in Safe Haven are quality stocks with beta of less than 0.65. Furthermore, these stocks are also rated ‘Buy’ by at least 65% of the research analysts that track them. This adds to the investment worthiness of the stocks. And additionally, we also pick stocks that institutions like mutual funds have increased exposure to in the past 2 months.

This selection criteria makes Safe Haven an ideal smallcase to invest in right now when the markets are volatile. The current portfolio is also diversified across sectors like Consumer Finance, Electric Utilities, Healthcare Providers & Services, etc.

In the past one year, Safe Haven has delivered 39.23% returns, which is an exemplary outperformance in comparison to the Nifty’s 13.54%.

Hence, to stay protected against market volatility, the place to be is Safe Haven.