How to be a Cautious Investor Amidst Market Turmoil

Since stock markets are well known for their volatility, an investor needs to invest in equities for the long term only so that he or she can wait till the markets recover. Irrespective of day-to-day fluctuations, the long-term average of stock markets increase, resulting in good returns to investors in the long run. As per the BSE Sensex history, index stock investments have never yielded negative returns over 10 years.

Due to the stock market fluctuations, equity investments face a significant amount of risk. Even if you have invested in a good company, an adverse situation in the market might result in the company’s stock price falling until the markets recover.

The day-to-day fluctuations render investors able to accrue daily return by investing during dips and redeeming during ups. With this daily, traders will be glued to their trading terminal during the trading hours for earning daily gains. Nevertheless, daily trading becomes addictive; daily traders are forced to undertake higher risks and invest more to churn more gain due to small gains.

In pursuit of earning more money, daily traders or small-term investors sometimes even borrow money for investing in stocks. Stock bankers encash the sentiments of these traders by providing money to them via trading accounts, mostly at a high-interest rate.

When the markets crash, an investor needs to wait for market recovery to make sure he or she gains over the investments made. If the markets take a longer time path for recovery, an investor who has invested borrowed capital will suffer the most.

On the other hand, an investor who has invested his or her own money but not his or her emergency funds can patiently wait till the market recovers. Since interest keeps accruing for an investor who has invested by borrowing money will be compelled to redeem at a loss.

An investor needs to consider liquidity, credibility, and investment period before initiating an investment. An investor who has invested his or her own funds needs to be patient and wait for the right time to exit at the targeted price.

If an investor is opting for borrowed capital, he or she must weigh between the fund value and the return on investment. A cautious investor has to weigh all pros and cons before exiting. Holding on to an investment for a reasonable period and monitoring it closely could prove to be a good strategy.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in

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