Should my portfolio worry about global uncertainty?
In an era of ever increasing global variables, event risks have become an increasingly frequent yet unavoidable risk.
Identifying the effect of global uncertainty on Indian markets
India today has emerged as an attractive market for foreign investors on account of a stable political environment and favorable market fundamentals. Foreign participation in India has been historically strong ever since the early nineties, post the financial reform movement initiated by the Narasimha Rao government. Today international investors collectively own an average of 20% of all Nifty 500 constituent companies. This has made India susceptible to global market risks.
However, it has been noticed that such events have not affected the long term trend of the domestic markets as the fundamentals of the domestic economy remain positive. Such market corrections have therefore offered domestic investors periodic opportunities to (re)enter the markets.
Since the start of the decade, we have seen 7-8 clear instances of global market uncertainties affecting domestic markets.
Many analysts have often argued that such market corrections are healthy from a technical standpoint as it reduces the risk of euphoria.
For long term equity investors, mutual fund systematic investment options offer an attractive technique to deploy funds in a manner that reduces risks associated with timing the market. A systematic investment plan (SIP) aims at buying MF units periodically to average the costs of acquisition over a pre-defined time period. The averaging helps ride out market vagaries by buying more units when the markets are down as compared to when the markets are at their peaks, thus reducing the overall cost of acquisition.
It is heartening to note that domestic retail investors have steadily started allocating funds to equity markets over the past several quarters. Mutual fund inflows, a barometer for retail participation in the equity markets have seen unprecedented inflows, many of them opting for SIPs. According to AMFI`s latest figures, monthly SIP`s have reached Rs. 4,947 Cr. in July 2017
While equities offer opportunities to build wealth at a faster pace as compared to debt instruments, the inherent risk associated with equity investments may often act as a deterrent to investors. Good financial management practices dictate that investors build a portfolio based on their needs and risk appetite. Ideal asset allocation is done after identifying the investor's attributes and accordingly assets are purchased in a manner that maximizes the return potential while minimizing downside and risk of loss.
As the saying goes, equities are a long term asset class, investors participating in the markets should look at the long term track record of the Indian markets. In the words of the legendary investor, Warren Buffet, "The stock market is a device for transferring money from the impatient to the patient". So long as Indian`s growth story continues to dazzle, equity markets are likely to offer fantastic investment opportunities in the foreseeable future.
The author is Senior Vice President & Head - Products & Marketing, HDFC Asset Management Co. Ltd.