How to make money in a volatile market

“Should I be investing at these levels? Is there any upside left?

“At these levels, the market seems to be poised for a steep correction.”

“Taking equity exposure at these levels would be foolish. Think it is better to stay in cash.”

If you have faced the above dilemma, then you are not alone—almost every investor is facing such dilemma. As the sensex fluctuates around 18000, investors are ecstatic on one hand and petrified on the other.

Investors usually ask us about the probable sensex levels achievable within say next year or so rather than trying to know the rationale behind our recommendation. More often than not, they feel investing in liquid fund is a better option for the moment and then wait for that “inevitable” correction.

Sounds believable, but sometimes the inevitable does not happen. Investors do not realize that more wealth is destroyed in waiting for the correction, then in the correction itself! We have been hearing of the impending correction ever since the sensex crossed 6k levels—and we’ve already reached 18k levels. Though we are not in any way suggesting that the sensex will keep on rising. However, what we do know is that the market is volatile and unpredictable. Else how can you explain the sensex movement from 12500 levels to 8900 and bounce back to 14000 levels all within a matter of few months.

So is there a way to use this volatility to our advantage??

Let us make a model—an extremely conservative and pessimistic one. We have assumed that the sensex goes up by just 8% over 2 year time frame.

The following table is constructed on the premise that the investment time frame is 2 years. Starting on 1/1/2007 at a sensex level of 13942; column A depicts movement of Sensex over 2 years at quarterly intervals. At the end of January 2009, assuming the sensex at 15063, the absolute return works out to be just 8% or 3.94% annualized.

Sensex	Date	Action	Units	NAV	Amount
13942	01/01/2007	Purchase	66.67	150.00	10000
10000	01/04/2007	Purchase	92.95	107.58	10000
12000	01/07/2007	Purchase	77.46	129.10	10000
10600	01/10/2007	Purchase	87.69	114.04	10000
11500	01/01/2008	Purchase	80.82	123.72	10000
10500	01/04/2008	Purchase	88.52	112.96	10000
11500	01/07/2008	Purchase	80.82	123.72	10000
12000	01/10/2008	Purchase	77.46	129.10	10000
15063	01/01/2009	Sale	652.38	162.06	105725

(Source: - moneycontrol.com)

Our MF scheme above exactly mimics the Sensex. The investor invests Rs. 10,000/- every quarter starting 1/1/2007 for 2 years, at the end of which he liquidates his holding. The CAGR of the investor works out to 23.41% against 8% returned by the sensex.

Conclusion

It proves:-

1. It does not matter whether the market is heated/overheated or not.
2. It does not matter whether or not it will post double digit return or not.
3. It does not matter whether there will be a correction or not post your investment.
4. It is possible to make money as long as the market is volatile and you invest at regular interval.

Sporadic or ad hoc investments are not going to be much helpful. It is regular investment alone that is going to get you another earning member in your family.

You need to do very few things right and avoid making big mistakes. The few right things that you need to do are:-

• Index level should not guide your investment decision. Rather your goals should be the guiding factor in planning your investments.
• Choose a diversified equity mutual fund with a good track record. You may if you want choose a core and satellite method in constructing your investment portfolio. Core portfolio may consist of plain vanilla diversified mutual fund while sectoral and theme-based Mutual funds can form the sectoral funds.
• Invest for long term and invest regularly.