The levy of LTCG tax to act as a dampener on investor sentiment for short-term
Valentine's Day may be less than 24 hours away, but investors are feeling no love in their relationship with stock markets. The over three-year bull run gave a long rope to many new and old investors, but a combination of global cues and local factors has dealt a heavy blow to sentiment, pushing many to think that this time around Elvis has certainly left the building. You can sob all you want that markets were going all strong even a few days ago and now are limping, but the truth is your financial goals still need to be met. The show must go on. How do you position yourself financially in the aftermath of the correction? Should you buy, hold, sell or do nothing? Experts tell DNA Money that the answers depend on your outlook and ability to stomach risk. Read on.
Who Are You -Acting investing is a science and also an art. But before knowing what is investing, we must understand ourselves. The Sensex may have dropped 2,200 points between January 29 and February 9, but your inherent risk appetite will not change. If you are a big risk taker, you will see opportunity. If you are conservative, you will be afraid. If you are balanced, you will generally take a 'wait-and-watch' approach.
In times of volatility, says Amar Pandit, founder, HappynessFactory.in, investors behave according to their nature. "An aggressive investor generally wants to take advantage of higher volatility and tries to time the market. Whether right or wrong, an aggressive investor generally books his/her profits or buys more in times of volatility," he said.
The aggressive investor's activity should be focussed on quality. This means that one should stick to high-quality stocks, bonds, commodities or funds when they buy. Balanced investors generally stay invested in the market in times of volatility. They generally wait and watch for any situation that may benefit them. They will not invest in new stocks until new information about the direction of the market has arrived, added Pandit.
If you have stopped equity investments in view of the long-term capital gain (LTCG) tax, it is time to understand that a tax does not upset the investment thesis. The levy of LTCG will act as a dampener on investor sentiment in the short-term. "However, in the long-term, investments will continue to flow," reasons Karthik Rangappa, vice-president - research & educational services, Zerodha.
The conservative investors are generally worried during the time of higher volatility and tend to avoid taking any investment decisions. "They prefer to remain invested in fix income instruments," points out Pandit.
Doing Nothing- While active investors have things to do whenever stock markets move, either way, another category of investors has nothing to do. These set of investors fall into the passive category: they have invested their money in investment vehicles like mutual funds, unit-linked insurance plans, pension products etc. In this case, it is the investment manager's responsibility. So, investors in these products should actually do nothing!
"Investors who are heavily into systematic investment plans (SIP) of equity mutual funds actually do not need to do anything. SIP allows you to invest a certain pre-determined amount at regular intervals. So, the SIP method will automatically do things for the investors. This is also true for regular investments in any equity-oriented financial product where you have automated investments at regular intervals," remarks Anil Rego, Founder, and CEO, Right Horizons.
However, there are some investors who like to take tactical calls irrespective of their automated investments. For example, if the markets drop, they want to put money lump-sum over and above the regular investments. "Such investors should view this market correction as a part of the bull-run. If they have sufficient liquidity i.e. money, they should accumulate whatever they want to buy at every 5-10% dip," notes Rego.
The sharp correction in mid-caps makes stock-picking a bit less challenging, as valuation premiums have moderated from the recent highs. "While we do not rule out a further correction, we believe, given our earnings recovery thesis for FY19, this correction offers a good opportunity to accumulate quality ideas where valuations had turned expensive," says Gautam Duggad, head of research, Motilal Oswal.