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Making The Most out of an Index Fall4 min read

March 20, 2023
investing in a falling market or index

Making The Most out of an Index Fall4 min read

The stock market is like a roller coaster and comes with its fair share of ups and downs. Recently, we have witnessed quite a few fluctuations in the market due to inflation, global events, corporate developments, and banks collapsing.

As an investor, it’s essential to know how to deal with a falling market.

Let the numbers speak

Now, onto some data. Nifty 50 is down 10% from its 52-week high, but its constituents, on the other hand, are on average down 18%. Let’s have a look at the top 10 constituents of Nifty and how far they are down from their 52-week highs.

The average here is about 14%. So even the largest Nifty stocks, which contribute to 60% of the weight of Nifty, have on average fallen more than the Index.

The upside

Well, this is a clear demonstration of the benefits of diversification. Diversification is the only free lunch you are likely to get in life – and it’s most useful during tough times. The Nifty index has 50 stocks. While most stocks may be down at the moment, a lot of stocks are also doing well. This is how top performers in the Index cushion the downfall when the index has fallen and prevent a portfolio crisis.

But this also means that if and when markets recover, individual stocks would do much better than the index. Not all stocks will recover the same way, and so, as a portfolio, the Nifty Index might not recover as much as individual stocks.

The investor’s takeaway

Well, introducing the next free meal – rupee cost averaging. Diversification, and staying in the index helps in cushioning your portfolio, but also means that when things look up again, your diversified portfolio might not do so well. In this scenario, one should look at rupee cost averaging, or what we all know popularly as SIP.

Why choose SIPs?

SIPs are a great way to deal with market volatility. In fact, with SIPs, volatility is your friend, as you get opportunities to reduce your cost price. SIPs help you stay disciplined, and focused on your long-term goals, and tide over market volatility.

Stock SIPs are a great tool for you to double down on your favorite stocks. Do your research, identify the stocks you like, set up your SIP frequency and amount, and let the magic happen.

Obviously, one has to do the required research to figure out which stocks fit your risk-return appetite, but a crisis always provides an opportunity, and stocks SIPs are a reliable way of getting the most out of it.

And here’s some proof

Let’s see how this would’ve worked out in the current fall. Nifty’s closing high in the last year was on 1st December, at 18812.50. Let’s say you were terribly unlucky and invested a lump sum amount that day. As of closing on 16th March, your investment would’ve been down 9.7%.

Instead of investing a lump sum that day, if you had set up a monthly SIP, your average cost would’ve been 18019, and your investments would be down only 5.7%!

But instead of SIPping into the Index, what if you had SIPped into the top 10 Nifty stocks?? Well, with a monthly SIP in the top 10 stocks, your investments would be down only 4.7%, and in fact, your SIPs in L&T and ITC would’ve been positive!

The same story repeats with a weekly SIP. A weekly SIP into the index would mean a cost of 17916.6 and a loss of only 5.2%.

The same strategy into the top 10 stocks would mean a loss of only 4.3%.

That was, hopefully, a convincing demonstration of the power of SIP, and why sometimes, stock SIPs might be more useful than Index SIPs. Remember that when it comes to reacting to the index fall, one has to be analytical and farsighted. And you will go far.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. This content is purely for information purpose only and in no way to be considered as advice or recommendation. The securities are quoted as an example and not as a recommendation. Paytm Money Ltd SEBI Reg No. Broking – INZ000240532. NSE (90165), BSE(6707) Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019.