Today, I wanted to dwell upon what I think should be our approach in such range-bound markets. I have mentioned in one of my earlier posts that timing a stock market entry or exit is the toughest decision to make in a market. Stock markets become relatively easy to navigate during bull runs or bear runs. In bull runs, people start buying all sorts of stocks. Stocks that have never been traded before and other penny stocks also become active and what’s more, people even start to make money on these stocks. Similarly in secular bear runs, one can make money by going short in futures or buying Put Options.
But in times that we are in, one has to be very careful about the investment choices. I definitely understand that everybody has their own comfort levels investing in instruments that they are used to. But this is the time to exercise caution. If you are investing in mutual funds, you must seriously consider going the SIP route and avoid taking large calls on the market. In case you are investing in direct stocks, my advice would be to stick to large caps. This will ensure that you remain invested and make some money in case the markets breakout on the upside. It will also cushion you in case markets tank as large caps correct much lesser than smaller cap stocks. Hence, your damage is relatively lesser. In case you are an F&O player, this is the time to go for a Butterfly spread option(this strategy though extremely popular in the US is still relatively unknown in India). If you are a slightly contrarian thinker, I would even say, why invest in equity at all? In times like these where there is a risk of potential downside, why not just invest in debt funds? Debt funds could comfortably give a return of 8-12% which we should gladly take in times like these.
Remember the traditional wisdom about investing money anywhere is that one must first ensure that they ‘preserve their principal amount invested’, something that my dad keeps telling me all the time. In a range-bound market, I think we must endeavor to follow this simple mantra. If we make sure that we are getting an assured minimum return on part of our investment and then diversify our surplus funds into a balanced portfolio, keeping in mind some of the thoughts in the previous paragraph, I think we would be well positioned to channelize our funds and freely ride the wave when the next bull run arrives.
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