Investment Decisions in a Bear Market

The last couple of weeks have been rather dismal for the equity markets. The sentiments are weak, no major institutional activity and depressing news from Indian banks. The market is set to remain in a range bound movement with sporadic downward or upward movement based on the news follow. The consensus however is for a weak market for the next several weeks which then can translate into a bear market.
Investment in a bear market strikes fear among the risk averse investors. Most of the investors at this point of time try to sell their portfolio/investments and not ready to buy at lower cost.

Understand the economy: Understanding the economy is an important factor. Investors should try to understand some major factors like inflation, growth in GDP, interest rate. For example, if inflation is going up then Central Bank will increase the interest rate to tighten the monetary policy. That will increase the cost of borrowings for the individual and for the companies. This will impact company’s balance sheets and profit will come under pressure. So it will be better to stay away from stocks which have high cost of debt and interest payments at this point of time.

Look for fixed income products: Investors should look into fixed income group like fixed deposits and fixed maturity plans (FMPs). If the investors feel that markets will remain bearish for the next one year or more then they should go for fixed plans where returns are assured and do not have much fluctuation due market sentiments.

Stay away from market: If the bearish mood of the market is for a prolonged period then staying away will be a great strategy. However, much on a contradictory note, a bear market could well be the opportunity to buy fundamentally good stocks which may have been beaten down.

Diversify the portfolio: Many investors try to understand one sector and get over exposed in that sector. And if that sector doesn’t perform then his portfolio looks shabby. So it is better to have exposures in different sectors rather than one sector.

Select mutual funds over stocks: Investors should move into mutual fund rather than investing in one or two stocks. Mutual funds are managed by professionals with years, and often decades of investing experience. These people have seen the financial slowdown in their experiences and protect investors’ money by putting into better investment avenues.

Understand the financial weather globally: Information about the local market is not sufficient. Investors must have some knowledge about the global economy. Like in 2008, when two big US banks failed, the global markets dropped drastically. Same goes for the recent tsunami in Japan. So if there is any adverse effect in the world economy, then there is a reflection of that sentiment in the local market. Similarly, if the world economy does well then there will be a sign that bearish market is going to get over soon.

Invest systematically: In the bearish market, the investor should be cautious and invest the money in a systematic way. The investors should stay away from jumping into the market with large pool of money. Rather they should play slow and safe.

These are some strategies which investors can follow to counter the bear market. Bear market typically puts into the mind of the investors’ a general sense of negativism. But being into negative sentiment does not help; rather they should look for alternative ways to make money even from bear market.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 167127

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