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The Big Bad Bluechip Selloff. Here’s how to put one together for use


The benchmark index is still down 10-12% from its highs.

The Indian stock market bounced sharply from the lows of March 2020 and has risen sharply until the end of 2021.

It was then that the upward momentum began to subside.

At the end of 2021, as companies reported second-quarter earnings, the signs of inflationary pressure were clearly visible in their P&Ls.

The Indian Consumer Price Index (CPI) went up to the height of the RBI limit reflecting slightly in the pocket of the consumer.

The rise in inflation called for a rate hike. Investors feared that the rate hike would increase the cost of company capital and, as a result, significantly affect profits.

Because investors were unsure about their future earnings, they thought it would be best to invest in safer investment instruments, such as G-secs (which become attractive as interest rates rise).

Thus, investors, especially FIIs, sold their shares, which led to a reduction in the upward momentum. This small sale quickly became important when the conflict between Russia and Ukraine was resolved.

The benchmark indices, Nifty 50 and Sensex 30, fell by about 15% as a result of these unforeseen events.

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Wider markets are still confused. The benchmark index is still down 10-12% from its highs.

This article is an attempt to teach our readers how to navigate this volatile market and how to move forward.

History repeats itself

This is not the first time that two countries have been involved in an armed conflict. There have been several such cases in the past. So it would be helpful to take traces of history and decide on our next steps accordingly.

If you look closely at how the stock markets reacted to these unexpected events, you will notice an interesting pattern.

Each time such an event occurred, the markets plummeted significantly in the beginning, and bounced back strongly.

Take for example Covid-19. In February-March 2020, India’s benchmark index fell by almost 40%. However, the market quickly regained lost ground.

If you take out the main index chart and see its performance from the beginning, you will notice that the index has been on an upward trend.

So one lesson to take away from history is this: Stock markets tend to be bullish in the long run.

The tide is sure to return.

When?

We don’t know. But you should consider investing in the markets if you are ready to be ready for the long term.

Where should you invest?

In such turbulent times, you would like to focus a large portion of your capital on companies with strong finances. These shares are known as blue-chip stock.

Although there is a certain level of risk associated with stocks, blue-chip stocks are the safest. There are a number of reasons for this.

* Blue-chip companies are the market leaders in their respective businesses. Their products and services are being used by millions every day.

* These companies have a long history of producing attractive returns on working capital as a result of a well-established and profitable business model.

* A key factor that sets Blue-chip apart from others is the position of money. These companies can raise large sums of money and thus eliminate liquidity concerns.

* These companies are known as dividend payers because they constantly reward shareholders with dividends.

* Finally, these companies have stood the test of time and are known for their ability to overcome all the difficulties they face.

Because of all this, blue-chip stocks are the safest investments in the stock market and you should consider investing there.

You can start with Nifty 50 shares.

The index fell by almost 10.5% and seems to be fairly valued. The price-to-earnings ratio (PE) of the index is 21.3, which is close to the median PE of 20.5.

So this is definitely a good time to make an investment in the index or its component stocks.

Ways to invest

You can invest in blue-chip companies in a variety of ways.

One way is to invest in index funds. If you invest in an index fund, you would invest in 50 shares of the Nifty 50 index. Your earnings would be the equivalent of a percentage change in the index.

One of the benefits of investing in index funds is that you don’t have to sweat, but you can enjoy the benefits of capital investment.

Another way to invest is to buy the shares that make up the stock directly. You should work hard in this case. However, if you are willing to take on the challenge and work on the process, you may end up overcoming the benchmark.

If you are investing directly in stocks, it would be difficult to keep track of 40-50 companies. Therefore, you should have a concentrated portfolio of 10-12 shares, perhaps the strongest in the package.

To get the most out of it, you can run a list of 50 shares through a variety of filters, such as return on equity (ROE), debt and equity ratio, price to profit ratio (P / E).

Once you’re done with a list, you can dig deeper into the basics of the listed companies.

Tide over volatility

War or not, markets will be volatile. Volatility is inherent in stock markets and it is important for investors to face big, wild changes.

However, long-term investment negates the effects of volatility in your portfolio.

In addition to the average cost, a simple investment strategy can help you deal with large swings.

The average cost is a systematic investment strategy where you divide all your capital into equal small parts and invest regularly over a long period of time.

For example, suppose you have Rs 10,000 that you want to invest in shares.

Instead of putting all the money in at once, you divide 10,000 rupees into 10 equal parts and invest the entire capital within 10 months.

Under this strategy, you get more shares at a lower price and fewer shares at a higher price.

This strategy ensures that the average purchase price is usually lower compared to it, thus maximizing returns for investors.

The right frame

Investors can make money if they systematically implement their investment strategies.

Ace investors around the world have a strong investment framework in place to filter out companies that are worth investing in.

There are standard procedures established in a framework for each phase of the investment process, such as stock selection, research, position size, etc.

So if you want to be a better investor, you need to think about building an investment framework that includes your strategies.

Make sure your framework has a rigorous baseline assessment procedure.

Happy investing!

Note: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

(This article is syndicated to Equitymaster.com)

(This story was not edited by NDTV staff and was automatically created from a union feed.)



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