The stock market has been one of the favourite investment options for many investors. It passes through three major phases; bull phase, bear phase and consolidation phases. Making an investment in the bear phase is one of the trickiest tasks. This is because there is widespread pessimism in the market and the stocks keep making new lows. Therefore, to survive in a bear market, you must have good bear market investing strategies. In this article, you will learn how to make bear market investment.
Let us first learnt the reason for bear markets.
Reason for Bear Markets
There are many triggers that take the markets into a bear phase. The global factors are the most common causes of it. And, a bad shape of the domestic economy further adds to the market woes. If we look into the history, unrest in the Middle East which affects the oil prices has always been a major reason for markets entering into the bear's grip. Moreover, instability in any part of the world also affects the stock market in some way or the other. Making bear market trading strategies in such a market can be tough because you cannot predict how worse the situation can go. Similarly, a fall in GDP of a country is another reason for bear markets. The slowdown in the economy leads to lower consumption and expenditure by the people. Here the market remains in bear mode until the economy shows signs of revival. Other factors that contribute to bear markets are double-digit inflation rates, unfavourable monetary policies, unstable political environment, etc.
In order to counter these situations, you need to have solid investment strategies. So, let us learn about the strategies that can give you good returns during the bear market investment.
Strategies for Bear Market Investment
- Purchase Index Funds
When the market enters into a bear mode, purchasing index funds at lower valuations can be very fruitful. The index funds replicate the performance of the index like Nifty or Sensex. Buying index funds can be one of the good bear market investing strategies because when the market will start rising you can make huge returns. Like for example, people who bought index funds during the recession in 2007-2009 and hung in there made huge profits in 2015. So the best way to purchase them would be to keep investing a small amount at every lower level rather than purchasing them at one go.
- Buying Short and Long Term Puts
You can make bear market trading strategies in the derivative segment to make profits in the bear market. When you feel that the market is entering into a bear phase and there are many long positions still existing, you can purchase short and long term puts on the indices. When you purchase puts and the market declines, you will make good gains with it. The options market move by a much larger percentage in comparison to the stocks, so even small put contract can give you huge returns and compensate for your losses in the long positions. These contracts need to be settled before the expiry period.
- Selling Naked Puts
Selling naked puts is another strategy to tackle the bear markets. When you sell the puts that others want to buy for premium is called naked put selling. There are always many buyers in the bear market and you can sell them a put contract. Here, you make a profit of the entire premium amount if the put contract expires at similar or above the strike price. Therefore, the best strategy in the derivative segment during a bear market would be to keep selling short-term puts of good companies.
- Find Stocks That Perform Better
During the bear market, the stocks trade at low prices. In fact, with the fall many good companies are available at very cheap valuations. Therefore, to take advantage of lower prices you must make bear market investing strategies by purchasing good companies for the long term. By holding stocks of good companies for the long term, you can create huge wealth for yourself. Furthermore, there are many stocks that do well in the bear market, all you need to do is research well and figure out such stocks. Purchasing stocks that are outperforming the market can help you make good profits even in the bear market.
After understanding the strategies for a bear market, there are few more other things that you must do or be aware of in the bear market, they are as follows.
Things to Consider in Bear Market
- A bear market is unavoidable and it is one of the phases of the stock market. When there are good times in the market, there would be bad too. Just remember the fact that good time will always outweigh the bad in the long run.
- Always balance your portfolio in the bear market. Allocation in the right assets or stocks is the key for good returns in the long term. Most successful investors make an investment in the bear phase and sell in the bull phase.
- Avoid margin trading during the bear market. Margin brokers allow you to trade more than you could potentially but you must not fall into the trap. The bear market is so powerful that it can wipe out your whole capital by way of margin payment. The best strategy in bear market is to purchase stocks and hold them for long period.
- There is always a temptation to short sell in the bear market. You need to control that urge because when you short sell a stock you hope to purchase it back at a lower price. But the market does not guarantee anything. It is very much possible that the stock price would rise after you short sell and hence, you must avoid it.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Commodity Investment – Reasons to Invest in Commodity Market
The world of investments has a vast number of financial instruments such as shares, stocks, bonds and many more. Commodities, too, are one such investment option available for investment. Even though the commodity market has grown substantially in the last few years, the participation of retail investors in commodities is still limited. However, the commodity market has huge potential and making the right investments in commodities can help improve the performance of your portfolio. What are commodities? Commodities are tangible goods that are either naturally occurring or can be agriculturally grown. Commodities are consumed directly or used as raw materials for manufacturing finished goods meant for public consumption. All commodities can be classified under either of the two categories- Soft commodities- Those, that are grown and cannot be stored for an extended period. Examples of soft commodities include agricultural products such as grains, tea, coffee, and livestock. Hard commodities- Those, that are obtained through mining and extraction. Example of hard commodities includes oil, metals and natural gas. Why should you invest in the commodities market? Commodities play an important role in the development process and hence are building blocks of every economy. Commodity investments can help you diversify your portfolio into a different asset class apart from shares and bonds and enhance the overall returns of your investments. For many of you, the general perception is that the commodity market is complex and hence not something that everyone can dabble into. However, commodity investments can fetch you handsome returns. Here are the top three reasons to invest in commodity markets for all types of investors-1. To diversify your portfolio One of the key factors that determine the success of your financial planning is diversification. Diversification with regards to investment portfolio means investing in various assets that are not correlated to each other of your portfolio in different asset classes. Most of you would be diversifying your portfolio in five major asset classes which include cash, shares, fixed income securities, real estate, and gold. In times of increased volatility in the markets, you are either holding on to cash or investing in gold. Gold is considered the safest haven for investment in turbulent times and Indians tend to invest in gold because it is considered as a symbol of wealth and has ornamental value. However, in reality, the gold in your portfolio is your investment in commodity and just like all the other commodities the returns from it are independent of the returns generated by stocks and bonds. Just like gold, there are other commodity investments whose returns are not correlated to equities and bond markets. The price of any commodity investment is a function of demand and supply and by doing proper research and analysis you can make profits from commodity market investments.2. To provide a hedge against inflation Inflation is the general rise in the price of goods and services over time. For any investment to be fruitful, it is important that the returns generated beat the rate of inflation. Higher inflation effectively erodes the real returns generated by your investments in stocks and fixed income securities. However, in the case of commodities, higher inflation relates to the higher price of commodities. So, unlike other investments, your commodity investments will result in a strong performance when inflation is high. Given the current situation when inflation is constantly on the rise, investing in commodities will provide a hedge against inflation.3. To improve potential returns The prices of individual commodities can fluctuate significantly due to several factors such as demand and supply, the impact of natural calamities, exchange rates and the economic health of the nation. The rise in infrastructure projects in a developing country like ours and also globally has had a positive impact on commodity prices. As the commodity market is still an untapped arena, many of them are trading at a lower price than their actual potential. Proper research and effective implementation of investment strategy in commodities can help investors improve the overall returns on their portfolio. What are the various options to invest in commodities? The commodities market is a very deep market and investors have many investment vehicles to access it. Let us look at the various options available for investors to buy and sell commodities1) Investing in the physical form Commodities such as gold, silver, etc., are bought by investors in physical form. However, not all commodities can be bought in physical form as it has its drawbacks of storage and spoilage. Even in the case of precious metals security and insurance increase the cost of your investment. Moreover, most of the time you want to invest in a commodity, not for end-use but to make profits if you anticipate that the price will increase. So, buying a commodity in physical form, except for precious metals, is generally not recommended for retail investors.2) Investment through commodity futures One of the most common ways to trade in commodities is through a commodities futures contract. It is a standardised agreement to buy or sell fixed quantities of the underlying commodity at a predetermined price on a specific date as mentioned in the contract. Also, commodity trades happen electronically through commodity exchanges where investing real-time commodity is possible. Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX) are two of the many commodity exchanges present in the country which help investors trade in commodities. All the commodity exchanges come under the regulation of the Forward Markets Commission (FMC). 3) Commodity ETFs Commodity ETFs are another popular investment option available for retail investors to diversify their holdings in commodities. Commodity ETFs invest in a single commodity and physically hold and store it, invest in a commodity futures contract or invest in a commodity index that tracks the performance of multiple commodities. Investors can invest in commodity ETFs electronically in their Demat account. 4) Commodity Stocks Investors who are not comfortable with investing in commodity futures or ETFs can diversify their portfolio in commodities is by investing in commodity stocks. Commodity stocks are stocks of those companies which are directly or indirectly related in the manufacturing process of the commodity and hence have a positive correlation with the commodity. For example, if you feel that the steel prices are going to increase, then you can invest in the stocks of various steel companies listed on the exchange. 5) Mutual funds One of the biggest reasons for an investor to shy away from commodity investment is that commodity investments require a lot of time, knowledge and expertise to make the right investment choices. However, now SEBI has permitted mutual funds to invest in the commodities market through the exchange-traded commodities derivatives (ETCD) route. Thus, retail investors can now participate in commodity markets in a structured manner through professionally managed mutual funds. Takeaway Commodities are a broad and diversified asset class that offers a great investment opportunity to investors. Given the high inflationary pressure and volatility in the markets, dedicating a small portion of your portfolio to commodities will help enhance the overall performance of your investments. Investing in commodities may look intimidating and you may feel a little hesitant to explore your options, but correct guidance from an experienced financial advisor can help you understand the nuances of commodity markets and make the right investment decisions as per your investment needs. Financial advisors at IndiaNivesh possess the requisite expertise and experience to help and guide you with investments in commodities markets.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Investing in Mutual Funds vs. Direct Equity Investment in India
The ultimate goal for each investor is the same – wealth creation! While the destination is the same, there are different routes that you can take to reach it. You can either invest in mutual funds or you can directly buy equity share or stocks from the open market. Each route has its set of pros and cons. In this article, we will analyse these two options and help you figure out which is the better route based on your requirements. Direct Equity Investment Direct Equity Investment is an active approach to investing. In this route, the investor takes the decisions regarding which stocks to invest in, when to buy/exit, etc. While investing in direct equity, brokerage charges are applicable when transacting via an intermediary. Direct equity investments are best done by those who understand the workings of the stock market and have time and capability to monitor and research individual stocks. Mutual Funds This is the passive approach to investing. Mutual Funds pool in money from a large number of investors and invest across multiple stocks/asset categories as per the scheme’s objective. The portfolio is managed by professionals who are equipped with the required knowledge and resources. Direct Equity vs. Mutual Funds – which route should you take? To answer this question, you will need to consider the below factors:1. Market Expertise Stock investments are not lottery tickets where you can invest in anything and then wait for your luck to work its charm. It requires a great degree of knowledge, analytical skills and experience to choose the right stocks for your needs. There are too many dynamics to be considered. If you have a thorough understanding of the markets (and economic factors impacting it), direct equity investments are ideal for you. On the other hand, if you are a novice, mutual funds should be your go-to channel. If you are not comfortable choosing which mutual funds to invest in, you can take the help of financial advisors as well.2. Time for research Studying, tracking and analysing the stock market and related economic factors is a time-intensive activity. If you feel that you can devote adequate time in analysing the markets and monitoring their investments, you should opt for Direct Equity. Else, you can go the mutual fund route. Mutual Funds corpus is managed by professional experts (fund managers) who are skilled and trained in that domain.3. Diversification The USP of mutual funds is diversification. They offer exposure to a wide range of stocks which form part of the portfolio. Even if you invest a small amount (let’s say Rs. 5,000), your money will be spread across multiple stocks. In the case of direct investments, you can purchase only a limited number of varied stocks. To achieve the same diversification level (as offered by Mutual Funds), you would need to have a higher investible corpus. It also depends on your risk appetite. If you are a conservative investor, mutual funds are a better bet as the risk is distributed. 4. Ownership Equity investments have dual benefits – capital appreciation and ownership rights. If you are someone who wants ownership rights of a company, then you should go for direct investing. You will be eligible to attend shareholders meeting, get voting rights, etc. With mutual funds, you will not get these privileges as the shares are held indirectly.5. Control When you invest via the mutual fund route, you have no say or control in the stock selection. That is at the discretion of the fund manager. So, even if you have good reason to believe that a particular stock is going to fall, you will not be able to take any action. However, if you opt for direct stock investments, you are your own fund manager. You get complete control over the buy or sell decisions. You can exit from single stocks, which is not possible with Mutual Funds.6. Taxation Some Mutual Funds (ELSS) qualify for deductions under Section 80C of the Income Tax Act. However, no such benefit is available with direct stock investments.7. Exit Load In direct equity investments, there is no exit load. However, in case of mutual funds, if you exit the scheme before the holding/ lock-in period, you may need to incur penalty charges in the form of exit load.8. Charges involved In mutual fund investments, you mainly incur transaction charges (when you go through an intermediary) and fund management charges (based on expense ratio). SEBI makes the guidelines for these expenses and fund houses need to adhere to the same. For direct equity investments, there are demat, brokerage as well as transaction charges. Mutual Funds have high trading volumes. This, in turn, brings down the per-transaction cost as compared to an individual investor with lower trade volumes. Conclusion There is no best investment channel that will hold good for each and every person. Both routes have their own merits & demerits. The final choice depends on you and your needs/ priorities. Direct equity investing can be highly rewarding for individuals with in-depth knowledge of the markets and high-risk appetite. However, usually, retail investors do not possess such thorough market understanding. Some may not be able to dedicate so much time to research or monitor the market trend or movements. In such situations, it is advisable to take the mutual fund route and leave the investment decisions to professionals or fund managers. They can suggest the best mutual funds to invest in as per your goals, needs and risk profile. Financial experts like IndiaNivesh have helped thousands of investors optimise the value of their investments. With more than 11 years of experience in the Indian markets, they are adept at understanding the specific needs of each investor. They offer a wide range of financial services including mutual funds, equities, derivatives, insurance, commodities, PMS, investment banking, corporate advisory, wealth management, etc. With an expert like IndiaNivesh, you are sure to make the best out of your hard-earned money.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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