Strengthen your investment game in an inflationary environment: Puneet Sharma
In the short term, the equity markets may go up or down but investors must think over the long term about the expected return from their equity portfolios.
The year 2022 has been so far, rough for investors globally, and the situation is no different for an average Indian investor. Standard and Poor's (S&P), Bombay Stock Exchange (BSE) Sensex & Nifty stock market returns have been in the negative this year, being very little for the investor to cheer about. The Indian equity markets are undergoing a cycle of correction. The global crude oil prices and supply chain constraints owing to the Russia-Ukraine war and the post-pandemic global inflation have had a negative impact on the Indian investor.
According to Reserve Bank of India, the inflation rate in India is likely to remain above the 6 per cent mark until December this year. Investors must have a strong investment strategy to weather the inflationary environment. Often investors panic and exit the market when there is a major correction. They either liquidate their assets or stop investing. In the short term, the equity markets may go up or down but investors must think over the long term about the expected return from their equity portfolios.
Can you time the market?
It makes little sense for investors to try and time the market in most scenarios. Investors can choose to wait and see if the market falls further, presenting them with an opportunity to procure a particular stock for a cheaper rate. However, the stock market is fickle and can move in the opposite direction very easily. Also, we firmly believe that any investor entering the stock market should have a long-term horizon for generating wealth. If the investment horizon itself is 10 years or more, it does not matter if the stock was procured for Rs 100 or Rs 98. The difference while calculating returns will only be a few basis points while the opportunity cost of missing out on the investment altogether might be much larger.
Investors should avoid modifying their investment philosophy in view of market corrections alone. It is reasonable for an investor to expect appreciation of their invested capital but if you have lost money due to the falling markets, the best course of action is to have patience and let the markets stabilise.
Think long-term to stay in the game
During inflationary times, household expenses of course go up. With prices of fuel and many everyday commodities at unprecedented levels, investors may defer their investment decisions in order to meet inflation-adjusted expenses. A healthy approach would be to relook at places where they may be able to pull back on non-essential expenses and remain invested in the markets.
Ideally, investors should create target-based investment capital pools; for instance, a pool which they can dip into for short-term increases in expenses without making any drastic changes in their lifestyle or current long-term investment portfolios. Also, the investors should always keep in mind that day-to-day market trends will differ but they should plan for the long-term.
Seek professional help for an edge
An average investor should consider leaving the management of their portfolios to professional. Investment advisors/wealth managers keenly follow developments in the market and any events impacting the wealth of their clients help them in making more researched decisions.
Without professional advice, while the investor may be able to save the service cost, he/she might end up with lower returns on the investments made. At the same time, those who do not wish to hire an advisor may consider direct equity investments or invest in Index ETFs or similar structures. They are generally lower-risk investments and are expected to generate returns in the long term.
Consider long-term investments
The number of Demat accounts in India has seen a massive increase during the past couple of years. There are more people experimenting with investing in the stock markets either directly or through mutual funds.
A number of tech-enabled solutions have also helped the newer investors gain access to offbeat investment opportunities such as cryptocurrencies and NFTs. However, crypto has clearly proven to be an unsafe hedge against inflation. At the same time, the traditional hedge of investing in gold is also prone to global price movements, especially given the impact of Ukraine war and Russia’s attempt at selling its gold reserve to shore up its liquidity.
However, it is yet to be seen if individuals will have a long-term view of their investments and continue to stay invested after the recent fall in the markets. Investors should stay focussed on their long-term objectives from investments in the equity markets, keeping in view an investment horizon of say 10 to 15 years to realise significant appreciation of their capital investment.
Authored by Puneet Sharma, President of The Fund and CEO of Whitespace Alpha