Stay invested, hedge, and prioritize large caps: Devina Mehra decodes strategies for trading a volatile stock market

In a post on social media platform X, Mehra said he remains positive on the markets in the medium term.

Putting it in historical context, Mehra highlighted the downturn in the Indian stock market between 2010 and 2020. ₹100 is a small investment ₹230, just above the yield on fixed deposits. This is in stark contrast to the 1980s. ₹100 investments surge ₹700.

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Mehra believes there is still room to grow given this historically weak performance, and that there is potential for further upside despite the recent post-COVID market surge.

“This is why I remain positive on the market. Even after the rally from the post-COVID lows, we have yet to break above the trend line, let alone get close to it.”

Managing risk in volatile situations

However, Mehra believes that the Indian stock market may be volatile in the short term. To mitigate this, she suggests staying fully invested and buying insurance through hedging to manage any potential downside. This strategy may be costly, but it is a smart move to avoid big losses.

She stressed the importance of staying invested to capture market gains, noting that missing just one of the best days each year can significantly reduce overall returns.

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“While some volatility is possible, a sustained decline is not something we expect, so we are not cashing out. Because while there are risks in investing in the market, you also need to remember that you can also miss out on an upswing by not investing. On average, if you miss even one day a year (the best day of the year), you miss out on 90% of the market movement. That’s what the data shows,” she wrote in the post.

So, if you’re looking at a medium-term positive but potentially some short-term ups and downs, the best strategy is to stay invested but hedge, she added.

Market capitalization dimensions

While that was the time aspect of looking at a portfolio, Mehra says the second way is to look at market cap stratification, and here Mehra advises to be careful with small caps.

While she remains positive on some large- and mid-cap stocks, she has significantly reduced her exposure to stocks with market capitalizations below $1 million. ₹5,000 crores.

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She says the segment has performed very well over the past 18 months or so, but risks are also rising. She also doesn’t see the following stocks: ₹Her PMS or Smallcase has a market capitalisation of Rs 1,000 crore but has reduced it significantly ₹The market capitalisation is also in the range of Rs 1,000-5,000 crore.

“Again, it’s a matter of risk management. This strategy may have sacrificed some performance points compared to more aggressive competitors, but our primary focus has always been to protect investors’ capital – their hard-earned money,” she said.

Risk management comes first, and stop-loss levels don’t work well with small cap stocks because there is often no exit when these stocks fall, she added.

Historical data supports this caution: from 2008 to 2009, the small cap index fell 78%, a level it had not reached in eight years.

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But that was only theoretical, Mehra noted, as the composition of the index had completely changed by then, and there had been a further 65% drop from 2018 to 2019.

“Also, remember that if something falls 80% and then rises 50% compounded annually for three years, you will still lose a third of your original investment. Abnormal returns in any segment of the market do not last forever. Hence, you need to be very careful of overheated areas of the market,” Mehra said.

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Disclaimer: The views and recommendations expressed above are those of the individual analysts or brokerage firms and not that of Mint. We recommend checking with a certified professional before making any investment decisions.

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Release date: May 29, 2024, 9:50 AM