Beyond panic: Smart strategies in a volatile market

Yes, it's been over six months and investors continue to pay the price. What started with high valuations, relentless FII selling and some slowdown in growth in India has now transformed itself into a major global crisis.

The earlier fall was more cyclical and there were steps and measures the government could take to bolster the markets. In fact, several market experts admitted that some fat needed to be trimmed from the market.

Just when investors saw some light at the end of the tunnel, the markets have once again taken a turn for the worse with the newly elected American government imposing sweeping global tariffs on the world.

Apart from their major competitors and trade partners, the US tariffs have not spared an island inhabited by penguins! Yes, you heard that right, the Heard and McDonald Islands, inhabited solely by penguins, have come under the 10% tariff bracket!

Typically in a falling market, or global crisis, one looks to the government to provide a soothing touch, a stimulus, but what can you do if the government itself has prescribed this ‘bitter medicine’

It's been a rough ride. However, panic will typically make things worse. This raises the question of potential actions that can be taken to mitigate the losses. In this article, we look at some simple yet effective strategies that can help navigate tough markets .

Quality domestic plays

Yes, the markets as a whole, are collapsing. But one step to mitigate risk is to evaluate opportunities that have a strong domestic exposure, or in other words, limited export exposure. In the heat of the fall, markets might fall synchronously, but as the dust settles and investors start to look for opportunities, currently domestic plays are likely to be favoured given their limited overseas exposure.

Sectors like banking, domestic consumption, domestic autos, energy, etc could relatively outperform the export-oriented peers and bring investor relief. Also, at times like this, investing in quality stocks – strong and consistent earnings growth, high ROE, lower debt – could provide a safer investment avenue.

To be clear, this is not an investment reccomendation and readers are urged to do their own reserach before taking any investment decisions

Invest cautiously: Margin of safety

Equity Investment is not a 6-month - 1-year activity. While hotly debated, one fact is that buying at the right price can translate into robust returns in the future. With falls such as we have seen, the market is increasingly becoming a stock picker’s market. However, given the current uncertainty, volatility is likely to remain spiked, as such, smart and cautious investing will definitely not only bolster your confidence but help shield your portfolio from heavy losses.

Pioneered by Benjamin Graham, the strategy of ‘Margin of Safety’ ensures you pay less than a stock’s true worth, creating a built-in cushion against market volatility, valuation mistakes, and downturns. Here’s how it works:

• Before investing, conduct a thorough analysis of a company's financial statements. Look for businesses with strong balance sheets and competitive advantages. Companies with high free cash flow and low debt tend to withstand downturns better.

• Set a purchase price at least 15-20% below the stock’s fair value, though this margin can vary based on market conditions, industry risk, and company stability. A higher margin (e.g., 40-50%) may be used for high-risk stocks, while a lower margin (e.g., 10-15%) may suffice for stable, blue-chip companies. This ensures that even if prices drop further, losses remain limited.

For instance, imagine buying a stock for ₹700 when it's actually worth ₹1,000. That’s a 30% margin of safety - your built-in buffer against volatility. If prices drop to ₹650, you lose just ₹50 per share, compared to ₹350 for someone who bought at ₹1,000. And when it climbs back up, you maximise your gains.

Rupee cost averaging – a steady hand in a bear market

Timing the market is tricky, especially in a bear phase where prices swing unpredictably. Rupee Cost Averaging (RCA) takes the guesswork out by ensuring you invest a fixed amount at regular intervals.

This means you buy more shares when prices are low and fewer when they’re high, gradually reducing your average cost per unit. In very simple words - invest systematically or via SIPs!

Example: Imagine an investor who follows a SIP by investing ₹10,000 every quarter into an asset whose price fluctuates over the year. This strategy ensures that more units are acquired when prices are low and fewer when prices are high, helping to average out the overall investment cost and reduce the impact of volatility.

If ₹40,000 had been invested in January alone, the investor would have received only 1,250 units. With rupee cost averaging, however, the investor acquired 1,280 units, improving overall returns.

One of the most common ways to implement RCA is through a Systematic Investment Plan (SIP) in mutual funds. SIP follows the RCA principle by allowing investors to invest a fixed sum at regular intervals.

Lump sum or SIP - which wins in NIFTY 50? A deep dive into NIFTY 50 data reveals how lump sum and SIP returns compare. The table below lays out the results:

Source: Prime Investor; Period upto December 31, 2024

The data tells a clear story - SIPs, powered by rupee cost averaging, can deliver impressive returns. Why? Because they smooth out the market’s ups and downs, ensuring you don’t get caught investing at a peak. Instead, you buy more when prices dip and less when they soar, making volatility work in your favor. The takeaway? Disciplined, consistent investing isn’t just smart - it’s a game-changer for long-term wealth creation.

Diversification always helps

In volatile or bearish markets, always ensure you have a diversified asset portfolio. While this may seem very obvious - a sustained bull market (like the one we saw from 2020-24) often leads a lot of investors to over-index in equity, in the hopes of making higher returns. It is only in markets such as this, does one truly understand or appreciate the value of a fixed-income product.

Structured products like Market Linked Debentures (MLD) offer an investment solution with risk-adjusted returns. MLDs have payouts tied to an underlying benchmark, such as the Nifty. This hybrid structure provides market-linked upside potential while incorporating capital protection features or downside risk mitigation through structured payoffs.

A real-world example of an MLD is one offered by InCred, a financial services company, with a maturity period ending in August 2025. Let us understand its key features and see how it plays in various market conditions!

Key features:

• Principal Protection: Investors get back their full investment at maturity, no matter how the market performs.

• Returns: The debenture offers a guaranteed minimum return of 15% over the 2-year period, with the potential for returns up to 30%, depending on the performance of the Nifty index.

• Participation rate: This means that the returns move in step with the Nifty index. For example, if the Nifty goes up 20% from its level from the time you invested, you also earn a 20% return on your investment.

How does it work?

Suppose you invested ₹1,00,000 in August 2023, when Nifty was at 19,500.

This structure allows investors to benefit from potential market upswings while safeguarding their principal against downturns.

Please note that some MLDs are non-principal protected, which offer higher potential returns, but carry higher risk as well. Besides this, investors should be aware of credit and liquidity risks associated with MLDs.

Not doing something is also an action

Despite all this, if you are still unsure, then maybe stay away. You don't need to worry about catching the bottom, but invest once the dust settles, when you are more confident.

Stay prepared, stay patient

Volatility isn’t the enemy - it’s the gateway to smart investing. A bear market rewards those who stay strategic, whether by securing a margin of safety, leveraging MLDs, following rupee cost averaging, or investing in businesses they truly understand.

The key? Adopt discipline over panic, strategy over speculation. As history shows, well-prepared investors emerge stronger from market downturns. The next big opportunity might already be in front of you - are you ready to seize it?