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It's hard, uncertain times in markets. But that should in no way scare away potential investors.

Have the markets bottomed out or will the free fall continue for a while? That's the question on investors' minds. But a definite answer is hard to come by. The markets will never tell anyone whether the downward trend has reached a dead-end or the upturn has begun. No one will ever know where the bottom is. Hence, trying to predict the bottom and waiting for the right time is a futile exercise. New investors should certainly start investing now in a staggered fashion instead of waiting for a clearer picture to emerge because the markets would have raced back to higher levels before that happens.

Is it the right time to enter the stock market?

Given that markets are looking choppy in recent times, this may be a good time to buy coveted large-cap stocks that would have been beyond your reach otherwise. You should look at splitting your money over 5-6 blue chip companies. Large caps as a category are the first set of stocks that tend to do well in most upturns - after a sizeable correction - as they represent a lot of value. Your equity portfolio should be skewed towards large caps with some sprinkling of good quality mid caps. You need to remember that the success of this portfolio mix would depend on the risk profile of the investor and there is no silver bullet here. However, in general, investors would do well by sticking to this combination.

However, some experts say you should have a clear reason as to why you intend to invest in a particular stock. Consequently, you should look at high-dividend yield stocks to protect the downside. Look at the dividend history of the stocks you short-list. Currently, public sector banks are offering 4-5% dividend yield. So, those could qualify as good buys.

Direct equity vs. mutual funds

Once you've made up your mind as to whether or not to enter the markets at these levels, the next question would usually be: equity-oriented MFs or direct equities? It would completely vary from person to person. One should have investments in stocks and mutual funds, though the allocation to mutual funds can be on the higher side. Buying stocks necessitates commitment to research, analysis, and sufficient time on hand to actually execute purchases and so on. Besides, one needs to figure out correct extent of exposure that can be taken for each stock. There is no point in having 50 stocks with Rs 5,000 invested in each. Diversification, investing in a staggered fashion, access to professional fund management and lower volatility can be better achieved through good quality mutual fund schemes. Mutual funds offer an ideal recourse to those investors who are not comfortable speculating on market movements. While zeroing in on the right mutual fund scheme, you could apply the dividend yield strategy to mutual funds - a diversified equity fund with a good dividend history will be a right pick.

Time to quit for existing investors?

That was for new investors. What approach should investors who have already pumped their money into equities adopt? Investors should always adhere to their asset allocation. If it has changed significantly, then you can either scale up your equity, debt or cash component based on what your situation looks like. Considering that the markets have nosedived, it is likely that the equity component has gone down. In that case, you could scale up your equity exposure. If it is already high, you could increase your portfolio's debt component by adding instruments such as fixed maturity plans (FMP) and liquid funds.

Debt ranks high among the alternatives available to risk-averse investors who've decided to steer clear of equities till the markets regain some semblance of sanity. However, there is a word of caution. If you are in long-term debt, it is better to move into shorter tenure instruments in the current softening interest rate scenario. This would protect any possible capital loss resulting out of the interest rate movement. Fixed maturity plans, PPF, EPF and voluntary contributions to PF are the options that you could consider. Some exposure to gold in a staggered manner could also be a viable option.

Investors need to remember that market turbulence should not be the only factor influencing your decision to exit equities. Before exiting any stock, investors should evaluate the future potential of the business, earnings growth, management capability and other parameters. If it's a stock - be it small, mid or large cap - with encouraging prospects, say experts, you would do well to ride out tough times with it.