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Look closer into the Dead Cat Bounce

inv dead cat bounce

Look closer into the Dead Cat Bounce

Look closer into the Dead Cat Bounce

The equity and debt markets move up and down because of a series of factors. It could be macroeconomic conditions within the country or global uncertainties. Sometimes, a falling market may suddenly show a temporary revival. This is just a short spurt of activity, referred to as a Dead Cat Bounce.

This phrase is borrowed from the saying that even a dead cat will bounce if dropped from a height. What happens during a Dead Cat Bounce is that a falling index suddenly rises. This could confuse investors by raising hopes of a turnaround during a down cycle.

A Dead Cat Bounce may also tempt mutual fund investors to make fund switches or rush to redeem. This could be a consequence of tracking the net asset value of the MF on a daily basis. It could entice investors to withdraw funds or make investments in troubled entities. Hence, it could be beneficial to look at your investment returns from a long-term horizon rather than relying on short-term blips.

If you are looking to invest in mutual funds, Standard Chartered’s SC Invest could be a convenient option.

What’s a Dead Cat Bounce?

In simple terms, it is a small burst of positive activity in the markets. So equities and debt that have been falling for the past few months could suddenly see an upward price movement. This results from short-term investors buying before another fall. When many others join this crowd to make purchases, asset prices increase. However, the gains are erased in just one to two weeks. A Dead Cat Bounce can last between three days to up to two weeks.

There could be similar situations in your investment journey, and Standard Chartered’s wealth podcast could help make informed decisions.

Why is it misleading?

Making investment decisions based on a Dead Cat Bounce could impact your future returns. This could be caused during periods of high volatility when short-term investors try to recoup losses by buying more.

For instance, say you have invested in a mutual fund scheme that tracks the IT sector’s performance. Then the IT sector indices fall and your scheme NAV drops. Consider the possibility that some investors buy more at this juncture thinking that the index has hit the bottom. This leads to the index showing a temporary increase in prices and a Dead Cat Bounce happens.

In the above scenario, the IT index has not recovered but has only seen a short phase of increase. Here, you may face losses if you make an abrupt decision to either redeem or add fresh funds. So it could be pertinent to wait for this phase to subside before making tweaks. Typically, a Dead Cat Bounce lasts up to 15 days.

When it comes to mutual funds, long-term investments could enable wealth creation. Hence, regular fund switches within an MF house or redemption to buy another MF may impact your returns and investment kitty. If you are risk-averse, there are schemes available in the hybrid and debt categories that could offer stable returns at lower volatility.

It could be perplexing to make the right investment from an array of MF schemes. To simplify your decision-making process, you could get information on the various MF performances through Standard Chartered’s fund select option.

How to avoid panic?

The solution to avoid a Dead Cat Bounce is to stay invested. If you have invested in an active fund, the fund manager would be responsible for making investment decisions to offer maximum returns. In the case of passive funds that are linked to an index, it would be favourable to track annual returns instead.

Market conditions change rapidly. You could stay updated on the latest developments through Standard Chartered’s market insights.

Whenever there is a Dead Cat Bounce, it could be vital to keep a track of how the overall market has performed. A sudden change that is going against the sentiment in that period would indicate that the upswing is temporary. For instance, a retail index rising amidst a pandemic lockdown could suggest that this increase is a stopgap phenomenon.

A better indicator of a reversal could be to monitor the NAV performance of your investment over a three to five-year period. Any decision to add units to the existing MF scheme or redeem units could be made based on this data. It could be better to steer clear of hearsay and instead rely on the track record of the MF to make future investment choices.

For long-term investments, it could be ideal to view NAVs on an annual basis rather than on a daily, weekly, or monthly basis. An MF fund may see volatilities due to sharp movements in equities and debt markets. The key here is to stay on and let revival happen in due course.

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This article is for information and educational purposes only. It is meant only for use as a reference tool. It has not been prepared for any particular person or class of persons. The products and services mentioned here may not be suitable for everyone and should not be used as a basis for making investment decisions. This article does not constitute investment advice, nor is it an offer, solicitation, or invitation to transact in any investment or insurance product. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Prior to transacting, you should obtain independent financial advice. In the event that you choose not to seek independent professional advice, you should consider whether the product is suitable for you. You should refer to the relevant offering documents for detailed information.

Standard Chartered Bank is a distributor of mutual funds and referrer of other third party investment products and does not provide any investment advisory services as defined under the SEBI (Investment Advisers) Regulations, 2013 or otherwise. Investments are subject to market risk. Read scheme related documents carefully prior to investing. Past performance is not indicative of future returns.