Volatility index and Indian retail investor. By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 3, 2015 | Posted by bobbysrinivasan << back to blog

In the last couple of years, the Indian stock market index has been fluctuating heavily which is partly due to similar happenings in the global stock market. However, this does not give any comfort to our retail investors as their portfolio value moves up and down with a big change. It is not unusual to see their portfolio drop by as much as 30 to 40% in a single day. The retail investor, generally is not well informed about the global events and left in a quandary and exits the market by booking the loss and perhaps never to come back again atleast for a while.

The following table will provide you with the India VIX close and the rate of change.

Date	India VIX close	Prev. close	% change
Aug 24, 15	28.1300	17.1150	64.36
Aug 16, 13	23.6400	18.7000	26.42
Aug 05, 11	24.9000	20.2200	23.15
Jan 06, 15	17.4200	14.1525	23.09
Sept 22, 11	33.8800	27.6700	22.44
Aug 09, 11	34.8800	28.7800	21.20
Aug 29, 11	26.0700	33.2600	-21.62
May 16, 14	24.2925	36.7650	-33.92

From the table, one can see that Monday 24, August 2015 was one such day when the stock market destroyed approximately Rs.7 Lakh Crore of investors wealth. That day the index fluctuated 64.36% to close at 28.13.

How does a retail investor survive such volatility? Certain important observations become relevant here.

It is said that the volatility is a friend of an investor. This is only partly true. This can happen only if the retail investor is mature enough to realise that the stock market will recover sooner or later and that he has to abide time to ride through the fluctuation. The risk taking retail investor may buy his favorite stock at a deep discount. He is essentially looking for bargains.
To protect his portfolio he may take a hedging position. The moment the stock market is showing evidence of a crash he may buy a put at the money. Such action requires both confidence and money.
Retail investor should as far as possible buy only shares of companies who have a steady record of high earnings, since ultimately increased earnings will drive the stock price up.

Finally, the stock market is not a place for a weak hearted person. Markets have dropped as much as 80% from its peak. (The Japanese index which 38500 in 1989 fell to 6000 in a couple of years and stayed there for many years). The current Indian P.E. ratio is above 20. In testing circumstances such as the Chinese devaluation, disappointing GDP numbers, the P.E. ratio could hit below 12. That means that Indian Sensex could go down substantially. It is not nice to discourage a retail investor but he or she should not enter the market not knowing the risks involved. Let us wish good luck to the poor soul.

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