A calm start to the day often separates thoughtful investors from reactive ones. Some people only glance at the Nifty 50 share price after the opening bell and then scramble to catch up with the crowd. Others prepare earlier, reviewing GIFT Nifty today along with overnight news and the day’s scheduled events. Neither number tells the whole story, but together with a few other cues they create a framework for sensible decisions. Here is a practical look at how to build that framework without becoming obsessed with screens.
The Early Routine of a Calm Investor
Preparation need not be exhaustive. A fifteen-minute routine involving headlines of the Indian economy such as inflation data, industrial production, goods and services tax collections and any statement out of the central bank can set the tone. Then, check whether companies are announcing their quarterly results and whether the large constituents have reacted to the news.
Next, follow the direction of early indicators and commodity prices, particularly crude oil, which impacts import bill, inflation expectations and the rupee. A significant jump in oil usually weighs on airlines, paints and chemicals, while benefitting energy producers. Currency movement also carries its own bearing, as a weak rupee aids exporters, but hurts importers.
Two to three observations and one action — “wait for the first hour” or “review my banking exposure” — in a routine will enable clarity and prevent knee-jerk reaction.
Domestic Flows and Their Growing Influence
In previous years, Indian markets were dominated by large foreign institutional investors and their buying or selling would dictate the direction of the market for weeks. Today, the market is witnessing a relative equilibrium. While foreign selling has been persistent over the past few years, the monthly inflows on account of mutual fund systematic plans have augmented domestic institutional voice in the market.
This has helped the domestic markets to stay resilient amidst foreign selling. Whenever overseas investors sold off shares in response to geopolitical or economic uncertainties, domestic mutual funds and institutional investors have bought up the supply off the market. Nonetheless, flows continue to impact markets. Prolonged selling by foreigners can hurt sentiments and the rupee, while buying tends to drive the market up.
Daily provisional data on inflows and outflows of institutional investors is available online after the market closes. While one should not get spooked by a day’s data, a reading of the week and the month is always indicative of a trend, which is more revealing than a day’s data. Combined with valuation of the market — measured in terms of price-to-earnings ratio of the broader market and its comparison to its multi-year averages — one can arrive at an informed view on equity markets.
Volatility, Expiry Days and Emotional Traps
India has one of the largest derivatives markets by number of contracts and expiry days can be particularly volatile. Weekly and monthly expiries can lead to sharp moves in the direction of the market as traders roll over their positions. Retail investors chasing such volatility without understanding options tend to lose money.
A simple rule is to not trade just because the market is moving. Volatility creates the environment of an opportunity slipping away and leads to multiple errors. If an investor is trading in derivatives, it is best to keep the position sizes small, understand the maximum loss given the premium paid and trade only with money one is willing to lose.
The volatility index, often referred to as the fear index, can also provide useful insights. A rising index indicates higher expected volatility and a falling index signals complacency. However, an investor should use it as context rather than a cue to act. Emotion is a better guide than any index. It is important for an investor to disengage if he or she feels excessively confident or fearful.
Long-Term Wealth Beyond Daily Moves
For most retail investors, the wealth creation in equities takes place on a long-term horizon. India’s long-term growth story and its ability to withstand global headwinds have enabled most investors to take a multi-year view on stock markets. The underlying fundamentals of the Indian economy such as youth bulge, increased formalisation of the economy, digitisation and infrastructure development have enabled most firms to grow steadily over time. The index funds and well-balanced portfolio of stocks, added to over a period of time with systematic monthly instalments, has rewarded many investors over time with a healthy return.
Review these on a yearly or a half-yearly basis and rebalance the portfolio to ensure that a larger portion is not exposed to equities and, in case of emergency liquidation, to ensure that liquid assets such as cash or debt are available to meet expenses.
Set goals in rupees and years – a child’s education, say, or retirement – and align your goals with an appropriate allocation to different kinds of assets.
Morning cues can be an aid to daily trading but they are only the opening chapter to the daily affairs of an investor. It is best to read them with a cool head and follow through on a well-thought-out agenda.
Miracle