5 Things We Can Learn From The Recent Catastrophes In Indian Markets

It has been an eventful year for the stock markets. Sensex and Nifty 50, that hit their all-time highs less than 2 months ago, saw their worst single-day fall on Monday.

Coronavirus, Yes Bank Moratorium, oil price war are some of the many concerns in the minds of investors at the moment.

From what some experts are calling the beginning of another global recession, we as investors may have a few things to learn.

1. Have more than one bank account

In less than a year, two banks- Yes Bank and PMC Bank- were taken over by the RBI over governance issues. The restrictions for depositors on withdrawals were sudden and imposed overnight. While these events make you question the loopholes in our country's financial system, as a depositor, it is wise to hold more than one bank account so that your income or payments are not locked or threatened as you wait for authorities to resolve issues.

You may also note that the deposit insurance on bank accounts was recently raised by the government to Rs 5 lakh. This amount limits to all the bank accounts held with one bank. If you hold another account at a different bank, the deposits in that bank will be separately insured for Rs 5 lakh, in case the bank is dissolved for financial failures.

2. Diversify your investments

As stock markets suffer losses over concerns on the economic impact of coronavirus and oil price war, mutual funds in India are faced with additional company-specific threats like the surge in debt burdens of Vodafone Idea from the AGR verdict and most recently from the deepening Yes Bank crisis.

Over 28 mutual funds have exposure to Yes Bank's AT-1 (Additional Tier-1 Basel III Capital) bonds that are proposed to be permanently written off in RBI's draft scheme for the private bank's reconstruction.

Mutual fund investors are naturally concerned about their investments in the current market scenario was major large-cap stocks have significantly fallen.

If you have mutual fund investments, stick to your investment plan and refrain from making any sudden decisions as volatility is part of market-linked investments.

However, the lesson here is that markets are unpredictable and it is important that you make other investments that are not dictated by their movements. At present, gold and bond markets have made notable gains.

Irrespective of market conditions, you may want to make gradual investments with long term perspective. It is common investment advice to "diversify your portfolio" with assets other than equity, including real estate.

Putting all your eggs in one basket will cause unnecessary stress arising from uncertainty and watching your hard-earned money erode.

3. Equity-based investments should be made with long term horizon

A study by Goldman Sachs and CNBC showed that there have been 26 market corrections (excluding the current situation) since World War II with an average fall of 13 percent that occurred over an average period of 4 months. These corrections have taken 4 to 6 months to recover, on an average.

Further, there have been 12 bear markets since World War II with an average decline of 32.5 percent. The bear market territory is when the markets are down by over 20 percent from a high. The recovery time from bear markets is much longer. These have lasted 14.5 months on an average and taken two years to recover.

The last recorded bear market was between October 2007 and March 2009, which could be recalled as the 2008-global-recession.

If the current market fall leads to another recession, it will take 2 to 4 years to recover which is also why experts advise on investing in equities for a period of 10 years to allow it time to recover from short term losses and give meaningful returns to build wealth.

4. Short term chase for returns may be a trap

In continuation of the previous point, hunt for short term gains is about trying your luck, which is not a smart investment strategy.

There are several "investment tips" shared over the internet or by your colleagues and friends.

A lot has been written and said about stocks that have increased investor wealth by 50 to even 100 percent in a span of 3 to 6 months. You may be tempted into buying them over fear-of-missing-out (FOMO) on a wealth creation opportunity but these stocks may be over-valued and you may not even understand why the stock is rallying the way it is.

The most recent example of unexplained gains or losses is IRCTC. The stock surged three times its issue price in 6 months and lost around Rs 799 per share in less than a week (in the month of March).

Similarly, the troubled Yes Bank gained as much as 32 percent on Monday even as other stocks on Nifty Bank tanked the index over 20 percent from its high to enter the bear territory.

There are media reports explaining the surge or fall but they aren't enough to support what prompted the sudden improvement or loss of faith in a stock.

5. Headlines do not explain everything

There is only so much a 200-300 worded news piece can include.

Experts say that it is wise to not pay attention to headlines in times of volatility as the market's reaction to those times is generally exaggerated. You may end up giving too much importance to some aspect of the news that will be easily forgotten by the markets in a few days.

News reports do not fully explain or do not have the complete information on why a certain stock has moved up or down.

For example, at the start of the year, the news of the US-China phase 1 trade deal was known. The deal was scheduled to be signed on 15 January, but the market experienced a blow after Trump ordered missile attacks that killed a prominent Iranian leader. There was panic over concerns of retaliatory actions and later insufficient clauses addressed in the US-China trade within the same month.

It is also in the same month that Sensex and Nifty 50 last reported their all-time highs.

No news report and analysis can explain the full extent of what caused a sell-off or a purchasing trend and there is no meaning in jumping to conclusions from news reports.

It is exactly why investment banking exists. Understanding the cause and effect of market movements requires a solid grasp of finance, accounting, valuations, management, etc.

The news piece you read may highlight an aspect of what may have triggered a sell-off but there is no saying on what will happen next.