DSP Asset Managers Chief Advocates Multi-Asset Portfolio with Global and Indian Exposure

Market Volatility: Navigating the Current Phase

After a prolonged phase of volatility, markets are no longer overheated but not deeply undervalued either. Retail investors are left wondering what to do next.

Markets have been volatile, and this naturally makes investors nervous. However, volatility is not an exception; it is the nature of markets. Investors get uncomfortable only because they don't expect it. As JP Morgan once said, "Markets fluctuate." This remains true even today.

Global data over decades shows that markets typically see intra-year fluctuations of around 20 percent. The trigger for volatility may change every year, but volatility itself does not. The key is to align investments with time horizon. If your money is for the short term, you should be in fixed-income or arbitrage funds. If it is for the long term, equity or hybrid funds are more suitable.

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Time Diversification and Asset Allocation

Two important principles help here: time diversification through SIPs and asset allocation through hybrid or multi-asset funds. This approach ensures that investors can weather market fluctuations and make the most of their investments.

Where to Deploy Fresh Money

Markets are neither overheated nor deeply undervalued. Where should retail investors deploy fresh money? The answer lies in finding a balance between risk and reward. For conservative investors, dynamic asset allocation or multi-asset funds make sense today. For more seasoned investors who are comfortable with volatility, flexi-cap funds are a good starting point.

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Mid and Small-Cap Investing

Mid and small-cap indices have performed well recently. However, investors should approach this segment with caution. This segment inherently carries higher risk, and companies tend to be smaller with earnings more volatile. The right way to invest in this segment is through SIPs. Lump-sum investments are better directed towards flexi-cap or hybrid funds in the current environment.

Investing in Gold and Silver

Gold and silver are highly volatile asset classes often more volatile than equities. Their long-term returns are moderate but can see sharp short-term moves. After the recent rally, it would be unwise to invest aggressively just because past returns have been strong.

Fixed Income and Inflation Risks

With inflation risks rising due to global factors, investors should approach fixed income with caution. Even though central banks have cut rates, long-term bond yields have moved higher, reflecting concerns around inflation, fiscal deficits, and global uncertainties. A better approach is to invest in shorter-duration instruments, where you can benefit from rising yields without taking significant capital risk.

Global Diversification

Global funds have delivered strong returns recently. However, investing globally just because returns were high in the last year is the wrong reason. Having said that, I am a strong believer in global diversification. Personally, I allocate around 20 percent of my portfolio to global markets.

Conclusion

The current phase of market volatility requires discipline and a long-term perspective. Investors should avoid panic during downturns and instead consider increasing investments when markets correct. By following these principles and being counter-cyclical, investors can make the most of their investments and achieve their financial goals.