The Market is on Fire

The Indian investing story is a good one. But for naysayers, there is always trouble round the corner with good news. Stock market indices are touching record highs with the Sensex breaching the 36,000 mark and the broader Nifty going past the 11,000 mark. The stock market gains have been consistent over the past few years and not a surge in recent months. There is more to cheer with the Economic Survey predicting 7-7.5% growth in the coming year. And, by the time you read this, the Budget announcements would have left its share of impact on the stock markets and economy for the positive. The optimists that most stock market watchers are, it seems like a never ending rise.

But the trouble with good news is that many a time one mistakes the image for content, but we are in times when it is almost impossible to argue why the stock market can’t be 50 per cent higher. The state of the world economy puts India under the spotlight as an attractive investment destination. FII inflows are strong, there is ample participation by domestic institutions and retail investors going by the deployment by mutual funds, interest rates are low and corporate performance is good. There is political stability, little to worry about global uncertainties and until recently a very stable and low oil price.

Equities all the way

Top stocks’ valuations are still competitive against past market highs, there is more retail money is flowing into equities and both domestic and global players have economic confidence in India. But this is India, and the land that gave the rest of the world instant karma also carries its share of uncertain outcomes, just the way the Indian cricket team, which is ranked at the top of rankings fared in South Africa. Yet, investors and traders are minting money, making it easy to ignore problems that might otherwise have been highlighted earlier. Thanks to stringent regulations, there is no talk of suspicious or hot money finding its way into the Indian markets, with the FIIs brought under vigil by the market regulator.

The IPO market is very well regulated and transparent, making it extremely difficult for price manipulation or allotment exploitation. Both the leading bourses have the necessary systems in place to ensure safety with good trading, settlement and regulatory system which guarantees the quality of your investing experience. At current market levels, investors can at least exit profitably or de-risk their portfolios. But it’s important to know what these risks are, and how to avoid them. We will come to that later.

The other factor that is bring in several new investors into the equity fold is the steady fall in interest rates, especially on guaranteed return instruments.

Due credit should also be given to the Mutual Fund industry which has played an active part with the mandatory education initiatives for small retail investors. The impact of rising inflows through mutual funds is evidence of this initiative working. Investors pumped in a record Rs 1.3 lakh crore in equity mutual funds in 2017, which was ably aided by the lacklustre performance of other popular investment avenues like gold and real estate. The strong inflows pushed the asset base of equity MFs to Rs 7.7 lakh crore last year from Rs 4.7 lakh crore in 2016 (See: Net inflows in Mutual Funds). The continuous inflow by retail investors can be attributed to the systematic investment plans (SIPs) and positive returns from equity funds.

Tempering returns

Sure, the stock market is booming. But as a retail investor, what’s in it for you? FIIs and other institutional buyers have size and liquidity criteria for their picks. But, given the way things have moved in the markets, several expert stock pickers and fund managers have started raising their concerns. Only a few good companies still have the room to grow, given the scale of corporate debt, quality among several large stocks and the price at which they are available now, makes stock picking a tough job. For the late entrants into the market, the growth experienced by those before them seems to be the new normal, which is not exactly the case in reality. So, where does it leave them? They need to check on their expectations from the markets.

Now is the time to bring the conversation about risk and volatility back on the discussion, especially now that the market is expensive, even if it’s not in the bubble territory. Moreover, each year, the stock markets do rally up just before the budget before finding its feet depending on the Budget outcomes, which could make them either go up or down. One class of mutual funds that have found favour among first time investors and conservatives are the dynamically managed balanced funds, wherein the equity and debt allocations are frequently rebalanced to follow the classic asset allocation model of investing.

The other factor that first time investors should keep in mind is that stock market movements are not linear and unidirectional. There is always a possibility of downside, and more so because we are no more into a moderately prices or cheap market level anymore. Considering the fact those significant gains of recent years will come from the right mid- and small-cap stocks that one identifies and invests in. Then there are the several stock offerings even as several companies prepare to go public. But, as much as wealth creation is a goal for everyone, wealth protection is also necessary in the times to come.

Managing risks

Asset allocation is important and rebalancing the same is equally important. You should maintain the asset allocation suited to your temperament and maintain it with an annual or half- yearly rebalancing. Likewise, one should diversify their investment portfolio with several investment options like equities, bonds, gold and mutual funds. You can opt for more than one of these financial instruments to diversify your portfolio. Further diversification can be achieved by including financial products offered by different companies belonging to distinct sectors. This protects the overall returns from the investments from market fluctuations and if a specific sector or company moves in an unfavourable way, the other investments in the portfolio can achieve the balance within the investors’ portfolios.

Another important trait you need to develop is patience. Several investors make quick and hasty decisions with every small movement in the price of their investments. It is important to determine your financial objectives before you set about investing and focus on both short- term as well as long-term objectives to enjoy the maximum returns on your investments. According to Martin Mayer, author of Nightmare on Wall Street – Salomon Brothers and the Corruption of the Marketplace; “The one lesson history teaches in the financial markets is that there will come a day unlike any other day. At this point, the participants would like to say, ‘all bets are off ’, but in fact, the bets have been placed and cannot be changed.”

What next? Caution should be the watchword and you will have to look at companies with visionary managements, robust business models, strong pricing power and good financials.

(A marketing initiative by Open Avenues)

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