Volatility and the Indian Stock Markets
June 19, 2011 8 Comments
The volatility of the Indian market which is above 26% is one of the highest in the world. So though the long-term CAGR of the Indian market is 15.60%, there have been specific points in time when the market returned 1.25% pa for a 10-year period as well as 19.98% pa for another 10-year period.
One of the biggest impacts of this volatility is that it increases the entry-point and exit-point risks in investing. The simplest way of tackling this risk is to invest in the market at regular periods of time, irrespective of its levels to achieve cost averaging and also participate in the long term upward trend of the Indian markets. Also it is better to stick to the stable large-cap blue-chip companies.
Another must do is diversification.Diversification across asset classes like debt, bullion, commodities, etc, helps in reducing the volatility of the overall portfolio due to the low correlation between some asset classes. For example, the equity markets fell by more than 50% in 2008, whereas some debt funds returned 27% in the same year. Commodities like gold have very low correlation with both debt and equities.