What to do now?

The last few days have been extremely volatile. If you have watched the last interview I gave on ET NOW, I had mentioned that my sense is we will remain extremely volatile in the next 4-6 months before things get better. For those who might have missed it, here is the link. Margin pressure will ease because raw material prices are likely to stabilise. Inflation will also start looking better because last year's high base rate will come into the picture and year-on-year growth in inflation will look lesser. Also, with the passage of time, the knee-jerk reaction of market participants will also likely reduce.

One interesting phenomenon to watch for is the FII / DII / retail investor flows. My sense is, and I could be completely wrong, that we will see a reversal in trend and see FII inflows and DII/retail outflows. FIIs will come looking for a safe haven and where there is some semblance of growth in an inflationary world. Retail investors, many of whom are first-timers, will be seeing their portfolios taking a beating and their fundamental assumption that making money in the market is easy will get challenged. Also, with normalisation post-Covid, people would return back to their professions and free time and mind space to dabble in trading will reduce which is more than likely to reduce their fund flows.

Another point which I tell often and probably is a great time to reiterate now is that market returns are non-linear. A 20% CAGR does not mean you will get a 20% return every year. Returns over shorter periods will be all over the place. Some years we will see negative returns and some years we will see very large returns. In general, if you are investing in equities, always keep in mind that a 10% correction is likely every year, 20% every 3 years and 30% every 7-8 years.

As investors with a 3-5 year view, I think it is a great time to remain disciplined. Those who sip into the portfolio stocks, keep doing it. One slight modification you may want to do is increase the frequency of deploying your capital. If you were buying once a month, do it 3-4 times a month now. Buy on the days when the markets are crashing. That way you are likely to benefit in two important ways: 

1) you will get a better average price

2) you will feel happier that you have bought at a lower price (and this point is actually psychologically more important)

We are now going through a regime change. Years of easy liquidity policy is ending globally along with forces of deglobalisation and higher inflation. Any transition is painful, but fundamentally, I think India is placed in a much better position today than at probably anytime in the past. 

I am hopeful for the future.