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Why you should ignore the recent market noise

The market trend over the last few months, clearly underlines that equity market returns are nonlinear. While many had given up on long term returns at the end of March, it also shows that patience in the market is what gets rewarded rather than panic.

For all the panic that the sharp equity market crash caused in mid-March this year, long term returns are looking rosy once again post the sharp uptrend that has followed. 

The market trend over the last few months, clearly underlines that equity market returns are nonlinear. While many had given up on long term returns at the end of March, it also shows that patience in the market is what gets rewarded rather than panic. 

How has a market moved up so sharply?

The word market really refers to a representative benchmark index. Usually, this index comprises of the top stocks measured in terms of market capitalisation. In India, the equity ‘market’ is represented by Nifty 50 or the BSE Sensex index. The former is a 50-stock index and the latter has 30 stocks. 

While the two indices have reached close to their high price again after the sharp crash in March, the stocks which have led them there are not the same as before. This means that at an individual stock level the recovery is not uniform. 

For example, HDFC Bank which is part of both indices is just 9% short of its high price before the market crash and at the same time, State Bank of India is roughly 40% lower than its high price before the crash. Reliance Industries Ltd is currently at its 52-week high price. 

One can say that the market is once again close to its all-time high and perhaps the risk of a correction is more. However, the experience of the past few months itself teaches us that predicting market movement is futile. If you pulled out your equity investments at the end of March, you may not have got the chance to reinvest everything given the speed of this recovery. 

These examples show that the market has many components and each rally or correction impacts its components differently. Moreover, it’s impossible to predict which part of the market will be strong in a cycle and how long a rally can continue. 

What should you do?

One can say that the market is once again close to its all-time high and perhaps the risk of a correction is more. However, the experience of the past few months itself teaches us that predicting market movement is futile. If you pulled out your equity investments at the end of March, you may not have got the chance to reinvest everything given the speed of this recovery. 

Instead of trying to time and figure out where the market is headed and which stocks are going to be the best performers in a rally, you are better off remaining invested through the ups and downs with your money entrusted to a qualified fund manager. 

The fund manager has the ability to pick a reasonably diversified portfolio which has something to gain from in different market cycles. Another aspect that will help, is to diversify this portfolio to include more than one type of fund manager or mutual fund scheme. 

Investing regularly will also help you buy in a market correction hence, balancing out investments made when the market is in an uptrend. 

Barring a cashflow situation, unless your long-term financial goal is a year or two away, remaining invested through the near-term volatility is the best route to pick. This means, keep your systematic investment plans running despite the noise in the markets.

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