Widely read:
India VIX, the volatility index, surged to a seven-month high recently, reflecting the nervousness and anxiety among investors. The markets are jittery, and that could be because of reasons like FII selling in large amounts, or possibly because of the ongoing elections, low voter turnout, or because of the geopolitical disturbances.
What is market volatility? Why is the market volatile?
Market volatility is exactly what the dictionary describes as volatility: something which goes up and down more often. Markets are more volatile, simply because money is at stake, and because we are not trading in fixed income; we are not trading in something which has a defined price.
The market is now integrated with the world, which contributes to its volatility. The market has seen significant gains, with mid-cap stocks up 63 per cent, the Sensex up 20 per cent, and small caps up 69 per cent. This makes investors nervous, fearing further declines.
The market is always facing uncertainty, whether due to elections, geopolitical tensions, or disruptions like Covid-19. Volatility can only grow, but despite this, the market tends to go up over time. Currently, we are witnessing pre-election volatility. Even without disruptions, the market can be disappointing. Speculative dynamics, such as futures and options settlements, also contribute to volatility. Individual investors sometimes get trapped by small movements, leading to significant losses.
The impact of elections on the market
Elections often influence market sentiment. The market currently reflects confidence in the current government's return. Historically, elections have had varying impacts on the market. For instance, in 2004, the unexpected election outcome led to a dramatic market decline. Today, extreme optimism could lead to significant market reactions.
Is the market jittery?
The market is not jittery. What appears to be market jitters are just normal fluctuations. The market remains at an all-time high and has not experienced a steady decline. There can be occasional declines, like FIIs pulling out money from the market or some derivative settlement, but these are part of the market's nature.
What should investors do?
Keep calm and carry on.
Regular investors who save and invest should continue with their plan. Those waiting for a market correction should stop waiting and start investing gradually (spread investments over months or a couple of years, depending on the scale of investments). Investors with significant accumulation nearing retirement should allocate a portion to fixed income.
Viewer's question
Prem asks, 'Indian markets are at an all-time high. Globally, this scenario is the opposite of India. What is the investment strategy you are recommending for the near and long term?'
The same principles apply: invest for the long run, diversify, choose good funds and avoid borrowing money to invest, and be tactical with your asset allocation. For stock investing, buy 15-25 stocks so that you're not exposed to any dramatic things happening. For short-term needs, it is important to have a fixed income allocation.
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