Why are the markets falling? India’s premier stock indices Sensex and Nifty have lost more than 4% each over the past five days. That's a loss of roughly 2,600 points for Sensex and 800 for Nifty.
Believe it or not, this is Nifty’s worst losing streak in over 12 months! Worried? Most investors are and as a result, they are panic selling their stock which can potentially cause a “bloodbath on Dalal Street”.
So should you be worried? And what should you do to safeguard your investments? Read on to find out.
Why Are Markets Falling?
Markets are known to fall due to various factors. Events like the pandemic, a new COVID variant surfacing, poor earnings by top companies, instability in global markets like the US, are just a few examples of factors that can make the markets fall.
Volatility in the market is as old as the concept of stocks itself. That’s why most long term investors don’t break a sweat when there’s minor volatility around the corner.
However, when there’s dramatic volatility and a drop of more than 10% in an asset or index’s value, it is termed as a “correction”, which is a fancy way of saying "what goes up must come down".
This time around, the market isn’t exactly experiencing a correction as the loss remains at 4% over the past five days and 2% since the start of the year. But it is dropping steadily enough to worry investors.
Given below are two graphs that show the current fall in Sensex and then the historical performance which indicates that the markets tend to bounce back in the long term.
Stocks and indices with solid fundamentals are known to steadily increase across decades. In fact, the market always recovers over time, so unless you absolutely need the money, there’s no sense in selling your stocks or mutual funds when there is a downward trend.
Take for example the first wave of COVID that ravaged the markets in March 2020. Sensex fell down to 27,590, its lowest in over 3 years, but bounced back to its pre-covid levels in approximately 7 months.
The reasons for the falling market in India include the following based on experts and analysts’ reading:
1. Rising US Interest Rates
Inflation in the US is exorbitantly high at this point and is currently at 6.8%. As a result, the US government is planning to raise interest rates pretty soon.
How is this related to India? When the US dropped its interest rates to prop up its economy, foreign investors turned to countries like India where the rates are higher and could fetch them better returns.
Now that the US plans to raise its interest rates, foreign investors can earn better returns by shifting their investments to the US. Mass sell-offs of this nature are known to result in a drop in stock prices.
2. Companies Publishing Earnings Reports
We’ve entered the time when publicly traded companies are required to publish their earnings report for the previous quarter. This is fondly known as the earnings season.
It is widely known in the world of investing that a company’s performance has the potential to affect its stock, at least as a general rule of thumb.
In fact, existing and potential investors have been known to evaluate key metrics like net profit, cash flow, sales growth, leverage and more to make buy, sell, and hold decisions that invariably impacts stock prices.
3. Falling INR Versus USD
The Indian Rupee has fallen to 74.78 versus the US Dollar. While this may not be its lowest over the past month, it coincides with a period where the US is looking to increase its interest rates.
Historically, a falling Indian Rupee generally means that foreign investors exit India so that they can protect their investments and shield their USD value.
4. International Tensions
Markets have also been known to react to international conflict, especially if there’s the risk of an incursion or war as events like these have the potential to disrupt logistics, supply chains, and more.
Analysts thus believe that markets falling not just in India but across the world may also be attributed to the recent tensions between Russia and Ukraine.
Should You Be Worried?
Rampant volatility is never a pleasant experience for investors. But the ones who’ve invested in companies with solid fundamentals for the long term are known to be less worried than others.
There’s also the fact that the Indian market has done exceptionally well over the past 18 months. Sensex has gained more than 20,000 points while Nifty has gained 7,000 in the same 18-month period.
So, not all is lost and experts believe that mass sell-offs by foreign investors, for example, is just a case of them booking profits in the short term and doesn’t reflect their overall outlook on the Indian market.
Investors who’ve been active for a while may also be worried about round two of “Taper Tantrum”, an event from 2013 that resulted in investors selling off bonds in droves and crashing the market.
Some Good News
This time around, however, India seems to be well-positioned to deal with the US Government hiking interest rates due to factors like:
Healthy forex reserve that is approximately $650 billion
Better import cover
Manageable current account deficit
Steady FDI inflows
Either way, Cube users are generally at ease even when the markets are falling. They’ve invested in handpicked and curated stocks, mutual funds, and assets unrelated to the market like P2P lending.
How To Invest Right Now?
First off it is important to steer clear of making brash decisions while keeping your long term goals in mind and staying the course. One of the best ways to do this is to build a robust and balanced portfolio.
That said, there are generally two types of investors:
Ones who panic sell: Those who sell as soon as there’s any hint of volatility in the market, usually lose money. This is generally due to a lack of confidence in the companies they’ve invested in. Invest in quality assets picked by a tested advisor with a proven track record.
Ones who stay the course: These are the type of investors who aren’t worried about volatility or market correction because they’ve invested in fundamentally strong businesses that can stand the test of time
These Can Be Your Guiding Principles When It Comes To Investing
1. Don't Make Your Losses Real
While your portfolio may be red the losses remain unrealised till you sell your assets. The Cube version of this is a popular adage, “Time in the market is greater than timing the market”.
2. Think Long Term
Remember your long term goals and stay invested through the volatility as long as you've spoken to a Wealth Coach and are invested in high-quality stocks and mutual funds.
3. Rupee Cost Averaging Is Your Friend
A Systematic Investment Plan (SIP) allows you to invest small chunks of money into mutual funds periodically. SIPs carry the benefit of rupee cost averaging.
The concept is simple. You consistently invest in a mutual fund during market highs and lows. As a result, you’ll get more units when the markets are in red and less when the markets are on the up.
Eventually, your units will be averaged out and this goes back to the same adage of staying invested in the market as opposed to timing the market. Thus, continue investing via SIPs in strong mutual funds.
4. Capitalize On The Volatility
Seasoned and aggressive investors alike are known to double down in such times which could reward them handsomely in long term, especially if they have idle cash lying around.
5. Explore Non-Market Linked Assets
There are investments like P2P lending and asset leasing that are known as alternative investments. They’re non-market linked which means that the ups and downs of Sensex and Nifty won’t affect returns.
On Cube, you can access alternative investments like:
P2P Lending by Faircent
Loans via Merchants by LiquiLoans
Asset Leasing by Grip
If you aren’t a Cube user, you can still get one free consultation with our Wealth Coaches who’ve been in the industry for 10+ years. Get a free consultation by clicking here: Safeguard Portfolio
Note: All facts & figures are correct as of 27-01-2022 and have been obtained from publicly available sources. Please consult a trained financial advisor before investing in any asset.
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on stock picking, poring over excel sheets, financial news, analyzing market trends, tracking the Sensex, researching company fundamentals, comparing mutual funds, reading financial reports, trying to predict the future & losing your sanity!