Equity markets have surprised everyone whether on their way up or on their way down and will continue to do so.

While it is impossible to take a short-term directional call on the market correctly every time it is also a futile exercise to time the markets.

The market might be subject to sharp correction this year but given the higher than expected corporate earnings nobody had anticipated a sharp sell off in February and early March.

It is very easy to dissect and point out several reasons such as the Chinese fever (Stock market fall in China led to a sharp downside in stock markets across the world), the slowdown in the American economy, or the budget or a combination of all these for the sharp decline in the value of the Sensex.

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The Sensex has lost almost 16 per cent in the last 2 weeks and wiped out the gains made from the beginning of 2007.

No change in fundamentals

India as an investment destination still continues to offer excellent opportunities in the debt and equity space. The fundamentals of Indian economy and companies continue to remain robust and a 15 per cent sustainable growth in profits over the next couple of years can be expected.

This profit growth should translate into a 15 per cent returns from the stock markets assuming a direct correlation between the equity markets and profits made by Indian companies.

At today's levels the markets have the potential to surprise us on the upside than on the downside. The returns however will not be in a linear fashion and there will be periods of volatility.

Paramount to see things as they are

The state of the Indian economy reflects itself through the stock markets. And if the former is on a firm footing the latter will have to follow. However, one must keep two things in mind.

First, this is not a 'gloom and doom' market. What we have seen was a sharp correction, which is healthy for markets. One should start worrying when the market surges in one direction continuously as this is precisely when valuations get ahead of fundamentals and signs of a bubble arise.

Nothing has changed fundamentally in the last two weeks. Just because the market is volatile does not make all the companies that are a part of the market volatile as well.

Volatile markets and volatile businesses are two different things and one would do well to understand this basic difference.

The economy is growing and expected to grow at least by 8 per cent per annum.

Inflation though at 6.6 per cent for the last several weeks seems to have tempered a little on the back of the steps taken by the RBI and, corporate earnings have registered a growth of around 30 per cent plus in sales and around 35 per cent plus in profits (which has been the highest even though on a higher base) etc.

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The results posted by India Inc in the third quarter of financial year 2007 (period between September-December 2006) are sufficient evidence of the fact that the long term 'India story' is here to stay.

Though profitability (rate at which profits grow) might slow down going forward, there are strong reasons to believe profits will continue to grow at 20 per cent in the next quarter (January-March 2007) and at least 15 per cent per annum for the next few years.

The way ahead

Don't panic.

It's very tempting for investors to 'throw in the towel' and sell investments.  In reality, this is the exact moment when they should be buying more.

Intellectually, we know this, but emotionally, it's difficult. However, it is important to override such emotions and do what you believe is in your best interests.

If you feel constantly worried about the ups and downs of the market, it's time to take a look at your equity investments, asset allocation (your investments across gold, property, mutual funds and stocks) and review whether you have higher exposure to equities than you should.

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If you are still not comfortable with the level of risk you are incurring, adjust accordingly or simply just stay put.

You can also look at investing in some of the funds in 13 month fixed maturity plan schemes offered by mutual funds that are offering around 10 per cent per annum post tax (which translates into a 14-15 per cent for someone in the highest tax bracket).

Buy regularly taking advantage of the current fall

It's difficult for one to take a call to buy at levels as high as 12,000-13,000 because you will be tempted to believe that the market will fall further by another 1,000-2,000 points.

People who have the Midas' touch of selling on time are not able to re-enter the market on time and vice versa. Hence it's in your best interests to take part in the opportunities presented by these sharp declines.

Everyone including the mutual fund managers, investment gurus and investors alike talk about buying when the stock market is down and selling when it is at a high.

But when it actually comes to doing so, we end up doing the exact reverse of what we aim for.