Factors to Control When Investing in Uncertain Equity Markets

Equity markets are risky and one usually wants to enter the markets when the risk reward is favourable. The way equity markets have moved in the past one year despite the covid-19 pandemic, a lot is being discussed about the sustainability of index levels at current levels. In short there is a lot of uncertainty and even some amount of volatility in Indian equity markets. Amid this volatility a lot of traders would be facing difficulties to keep their nerves as the risk reward scenario is not looking very favourable. No wonder this is the time when the character of a trader is tested. And when such a scenario is faced, not many factors are in our hands. When it is a trending (either way) market everyone likes it. However when the markets are highly volatile or we can say uncertain, this is the time when the traders commit major mistakes. And mistakes are bound to happen in terms of position sizing, false breakouts, extra risk taken and over leveraging. Such mistakes are anyway expected as not many (those who have just entered the market just last year) have seen difficult market periods or bear phases.

Whenever market participants face such scenarios not many things are in our favour. Rather when retail investors get stuck in such trades or scenarios, experts suggest – now just wait n watch as it is the market that would do its bit. We opine, in scenarios when the thing is uncertain there are few controllable factors in our hands as well. Let’s understand such factors that would help the investors avoid a few of the mistakes.

When one invests in any asset class there are factors that drive returns- while a few of such factors are in our hand, others are not. Especially for short term trades. In the long term everything would fall in place the way investors expect, in the short term the things would remain irrational. While investing for long term it is expected that the price of an asset discounts everything and hence is considered as a rational price. However, for the short term, there is often a time difference between the traded price and the actual value of that investment. For instance, when the market witnesses a decline, the price of an asset trades below its intrinsic value. There is hardly anything one can do despite the fact that what we hold has a higher intrinsic value. But market forces are such that one can hardly do anything about it. However, while one may feel helpless in such volatile markets – there are 4 factors that one can control when investing. Let us look at one of them in detail as below.

Control Brokerage Cost

The first factor which one can control is the brokerage cost. While it is a compulsory cost, investors usually tend to ignore it and hardly give any importance when investing. Not many people do their research right when selecting a broker. Thorough research is something one must not skip. In an era when almost everything is available online, researching is not a tough task.

There are discount broking options that are available. These discount brokers help the investor in saving brokerage costs. While it is true that the broking cost has considerably come down. It is still a compulsory cost and can be managed properly if in-depth research is done. With discount broking, we achieve one target of trading by saving a little on the brokerage cost.

However, the task does not end here. One should also take care of a few things. With fast paced lives, people tend to buy at market price which actually impacts their cost, thus eventually impacting brokerage cost as well. For those involved in day trading, this is of utmost importance to save on the transaction cost and not to pay higher (even if it is just a fraction of a rupee).

Always set a price at which you want to buy. If the scrip comes at those prices then only do the trade. So this helps you in trading rarely rather than trading frequently.  Again patience is a key here. So, in a nutshell – trade rarely, trade patiently and most important; cheaply.

Control Ownership Cost

Another thing in markets, especially while investing in mutual funds, is the ownership cost. One can control the investment cost by refusing the mutual fund investments with excessive annual expenses. Though it is the right of asset management companies (AMC) to charge fees, some overcharge the investors in terms of management fees and advertising expenses. Avoid the AMCs charging higher fees. Expense ratio in the long run makes a significant impact on compounding in the long run. Always try to keep the ownership cost lower. While we have provided an example of mutual fund investment, it is applicable in terms of trading as well. Ownership cost in terms of holding multiple broking accounts and demat charges should be always looked at closely. Further the details about holding period (short term and long term) should be properly observed to understand the taxation impact on the returns.

Control Your Expectations

When it comes to investing we have certain expectations about the returns from investment. Whether it is equity or mutual funds, such investments can only provide sensible returns that are comparatively better than the risk free returns one can generate. Remember, it is a myth that equity investments can double one’s money in no time. Since 1991, the Sensex has provided a CAGR of 16 plus per cent. So, when we invest in equity or mutual funds, anything inline or marginally above 14-16 per cent CAGR is realistic. The bottom line being – be realistic. Do not expect any fancy or extraordinary returns from equity markets. Problem is, since the past one year the markets have only moved northwards. And hence the Expectations have hit the roof. One must understand that the equity markets are not that way. It just won’t move one way upwards. There are ups and downs and hence controlling expectations (especially when it has moved up more than 100 per cent in one year. Controlling expectations from the market is Very much important.

Control Risk Appetite 

This is a crucial factor. One needs to decide how much to put at risk while investing. People tend to get attracted by fancy returns expectations and put in all the resources at work. It is important to understand the difference between risk appetite, risk capacity and risk tolerance. We have already discussed these three aspects in our earlier blogs as well. It is advisable to keep only that money in equity markets which will not impact your financial stability if lost. Else, we would advise opting for mutual funds based on their financial goals.

Control Your Own Behaviour

Here one must understand a quote from Benjamin Graham, “It is not about beating others at their game. It is all about controlling yourself at your own game.” So, control your own behaviour in terms of herd mentality or reacting to rumours. Everyone tries to beat the indices or benchmarks.

We’d like to quote an investment anecdote to explain this point. At an investment forum, there was a question asked to an investment wizard, ‘Did you manage to beat the index or benchmark?’ The wizard said, “Honestly, I don’t know! I have made so much that they call me amazing.” The lesson here is that one gets an answer and a good investment strategy too. It’s not about beating the index or benchmark, it’s about meeting one’s financial goals.

Conclusion

It is important to control things that are controllable and act accordingly. For instance, in volatile or turbulent times it is important to control one’s behaviour. In other cases it is important to understand the risk appetite and so on as per one’s financial goals. Try not competing here.