Do frequent changes in government policies bother you? Think of investing the active way

We are in living in interesting times. Investors chase momentum in stocks which will benefit from exports and then suddenly we get to know about the imposition of export duty that makes the business less competitive in the global market.

On one occasion, the government totally bans export and on another, the government removes import duty to increase supply in developed markets. While the former kills the profit potential of exporters the latter pulls down margins of domestic manufacturers. Share prices fluctuate and investors turn cautious. These abrupt changes can be unnerving Many equity investors find it difficult to deal with them

Let us understand why this is happening and what you should do in this situation:

The COVID-19 pandemic has impacted macro-economic structure of the global economy. As a result of this, the global trade was impacted like never before. Supply chains are disrupted and protectionism is the buzz-word. The world, especially the developed part of Europe and US, is battling with shortages of resources – something that was unheard of. Inflation is here and the usual weaponry of rising interest rate is being used to douse the fire. No wonder, the governments have also resorted to fiscal measures. But that means too many changes in policies and the ways in which businesses will be conducted.

Each of these changes impacts margins or volumes or both; and thereby overall profits of businesses. The spikes and crashes in stock prices need not be the final verdict. Markets adjust to a new set of information over a period of time.

And most investors looking at short term movements tend to land on the wrong side. Just because the share price of a company goes up, it does not mean that the company will really do well over the next one year or two. There are too many risks and scope for slip between cup and lip. A company may not execute its new projects right to benefit from an opportunity.

Now, consider the other side. When an adverse policy measure is announced, then some stocks go down where traders anticipate drop in profitability of the company. However, promoters of such a company may decide to tweak their business models, may launch new products and services which may offer higher margins compared to existing products, may resort to cost control. Such companies may actually come out stronger in such adverse environment.

Does an average investor have the skill, time and bandwidth to keep track of these changes? Can she follow up with developments in each sector in the economy? Very few investors may even attempt doing that. But that does not mean they should shun investing in equity as an asset class?

Never make this mistake. Investments in shares is a big booster dose to your investment portfolio. It helps you to beat inflation over long period of time. A well-diversified equity portfolio built using stocks of fundamentally strong companies can help you achieve that. Such a portfolio can also absorb the shocks if a particular stock goes down due to adverse policy changes. This is possible when you are invested in an actively managed fund.

An active fund manager can dump a stock quickly if he foresees poor future for a company, a passively managed fund however, will have to wait till the underlying index gets reset at the predetermined interval – say half yearly or quarterly. By the time such a stock is removed from the portfolio, the damage can be phenomenal for passive funds. An active fund manager can also take positions in stocks which are battered due to excessive pessimism over policy headwinds faced by a company or a sector. Such positions can significantly rewarding in medium to long term, if the estimate of the active fund manager comes true.

Allocating a significant chunk of your equity portfolio to actively managed schemes can help you build a large corpus over long period of time.

If you choose to allocate money to flexi-cap or multi-cap schemes, then you are more likely to get better risk adjusted returns, compared to do it yourself investors who may be punting on stocks where the portfolio may be skewed in the favour of a couple of stocks. Investors can consider investing in flexi-cap funds such as PGIM India flexicap, Canara Robeco Flexicap, and Parag Parikh Flexi Cap.

Investors should ideally choose to invest in a staggered manner – systematic investment plan (SIP) or systematic transfer plan (STP) to ensure that they reduce timing risk.