Personal Finance: Making Volatility Work For You

PERSONAL FINANCE: STOCK MARKET
Making Volatility Work For You

The mayhem in the market presents a great opportunity if you know how to leverage volatility. Here are some starting points.

By Roshni Jayakar

It isn't easy playing the market, not with the Sensex displaying the characteristics of a rabid yo-yo. Although the market seems to be in the clutches of a bear hug right now, there's no telling which way the index will move. Indeed, volatility has become a constant in the behaviour of the most watched figure on Dalal Street. Twice in the last four months, first in July, and then in September, the Sensex has lost close to 7,000 points in the space of a few trading sessions.

That's a great opportunity for investors: buy on the dips (or 'corrections' as some term them), and sell on the spurts. That's not the advice you'd get from fundamentals-watching eggheads. But that's what you could do-invest in companies not on the basis of their intrinsic strengths but because their stock could move up. Not convinced? Well, if you had bought 10 shares of Infosys at Rs 6,025 on May 24 and sold them at Rs 8,392.30 on July 12, you would have made a cool Rs 23,670 in less than 60 days.

The secret is timing. Buy before others start to buy and sell before they do. Indeed, if you didn't sell those 10 Infosys shares on July 12 (in the example cited in the previous paragraph), the value of your investment would have dropped to Rs 67,950 on July 24. There's no shortage of home-spun market-wisdom awaiting he who wishes to benefit from volatility. Here's one: once a scrip touches the upper-circuit level in three or four trading sessions-sell it, or book profits.

As Nirjhar Handa, 26, an analyst with Mumbai-based Parag Parekh Financial Services, puts it: ''In a dull market, where you are not sure something will trigger a major market rally, a 15 per cent to 20 per cent rise in the stock price is good enough to book profits.'' There is a science of sorts to leveraging volatility. Here goes, but don't do anything rash:

Look at the indices. Before you take the plunge, ponder: is the market headed North or South? If it is headed North (even if the pace is a trifle slow), it may make sense to buy some scrips. Like MTNL; which reached its 52-week low of Rs 111 on October 3. Anything that takes the index up will obviously cause the stock price to move up. And even if the Sensex remains range-bound, the scrip could move up if there is follow-up buying.

Look at valuations. The magic measure is peg (Price-earnings to earnings per share growth ratio). So, if the PE multiple is 80 times and EPS growth expected is 80 per cent then peg is one. In the case of tech stocks, for instance, this ratio should not be higher than 1 for category one scrips like Infosys or Wipro, and 0.6 for second category technology scrips. And stocks that this measure indicates to be undervalued are great buys. For instance, Infosys' current peg is 0.75-0.8, indicating scope for appreciation. Says Shyam Bhat, 29, Fund Manager, Tata Mutual Fund: ''A disciplined strategy of buying and selling is necessary, keeping in mind the valuation of the shares.''

Pick the right sectors. Not all sectors swing with the index, and if you have the misfortune to pick one that doesn't, you can never benefit from the volatility. Tech or pharma, at this point in time, look like good bets.

Watch the volumes. Keep an eye on the volumes of trading. Stock that sees increasing trades will move up as the Sensex moves towards the upper limit of its trading range. And vice-versa.

Stay away. That's right. If you are a risk-averse individual investor reading this article to find a risk-free way to bet volatility, you've wasted your time. Despite our prescription, you may fail to catch the dips and the spurts, and be caught in a no-man zone.

For you friend, funds with an actively managed portfolio are just the thing. These are the funds in which the top 10 stocks change every month (or at least every quarter). Then, here's a tip for today: Alliance Equity and Tata Pure Equity look like actively managed funds. Happy swinging.

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