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If you are concerned about how your investment will play out, you must watch out for events happening globally besides domestic developments.
Many people hold the misconception that risks associated with their investments are mostly domestic.
Therefore, they think and focus on possible risks like general elections, border skirmishes, low domestic GDP growth rates, etc. Whereas in reality, our investment returns are majorly affected by what happens globally.
India is strongly intertwined with Global markets financially and economically. Thus what happens in the USA and other developed economies has a significant impact on the Indian economy as well.
India benefits from a global surge in liquidity which is reflected in rising stock prices. A global liquidity glut has the opposite impact on the stock markets.
Among many, there have been two major instances I would like to highlight to confirm this:
1. The IT bubble burst in 2000 was majorly a US phenomenon but Indian stock markets corrected by 60-65% from the peak.
2. The subprime bubble crash in 2007-08 was confined to developed economies, then also the Indian stock market crashed by 65% from the peak.
Right now the biggest known risk (apart from many unknown risks) faced by Global economies is persistent inflation which could lead to a sudden monetary policy reversal towards faster tightening by increasing interest rates and reducing system liquidity.
Therefore, the next time when Indian equity markets suffer a severe crash, the most possible reason could be global and not domestic.
And to avoid any element of shock, one must look out for both Global & domestic risks and be prepared for the possible impact on their investments.
Irrespective of what you think about the strength of your mutual fund or stock holdings, the global market crash will take down your portfolio as well.
A rising tide (of easy liquidity) lifts all the boats (equities) and falling will have the opposite impact.
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
