The Sensex is near 40,000 and the Nifty is closing in on 12,000 level. Clearly, domestic stock markets are on a high. That being said, new investors entering the market today, either directly through stocks or through MFs/ULIPs, are worried about a fall from the peak. There is plenty of not-so-positive news around. One US dollar is Rs 71. Crude oil (brent) price is $77 per barrel. Interest rates have been hiked for two times on the trot. For a net importer country like India, this is not good. On the other hand, GDP growth in Q1 was 8.2 per cent. Corporates say their earnings trend is improving. In total, there are conflicting signals. Nobody can say if markets will rise or fall. That is a personal call every investor, including you, have to take. However, you can always position yourself according to your stance. Want to know more? Read on.
If You Are A Bullish Investor
If you are bullish, you can continue to invest in equity and equity-linked avenues. The reason for choosing equity is very simple: over a long period, say 10-20 years, equities give better returns than inflation. However, it is important to not go overboard in equities at this juncture. When the Sensex dropped from 20,000 levels in early 2008, it took six years i.e. 2014 to regain the same level. Direct equity investors must consult with investment advisors to buy safe and top-quality stocks.
A large cap bias is essential, although you still may buy undervalued midcap and smallcaps. Big companies, established in their own domain, have consistent sales and profit. Stocks of such firms that have low debt and high cash not only protect during a downturn, but also perform well in other times. If you are investing through mutual funds or ULIP route, choose fund options that offer 70-80 per cent large cap exposure. Largecap stocks are the top 100 listed companies by market capitalisation. Diversified MF and ULIP portfolios will choose 30-40 such stocks. Among the things that even bullish investors should not do is avoid any form of leverage to invest. Invest with what you have. Do not borrow money to take position even in the best of companies. If you are looking at themes, go for the ones which have a strong linkage to domestic growth. The global landscape is much wider and companies operating in that segment may be affected by small things.
If You Are A Confused Investor
A large proportion of investors today are confused. But as Tom Peters said: “If you're not confused, you're not paying attention.” It is difficult to have strong one-sided opinion. However, there are a few markers. First, equity markets are not as cheap as they were 4-5 years ago. Two, if you do not have an investment horizon of 3-5 years, do not be in equity. Three, unless markets go up like they have in the past 20 years, there is always the slight chance of you investing at a high point and being stuck. On the other hand, equities have shown great growth and returns. If you are a confused investor, it may be a good idea to have less than 100 per cent exposure to stocks. The ideal number, i.e percentage of exposure, depends on you. It could be 30, 40, 50 or even 80 per cent. Jot down your personal wealth details and see what is your current allocation in equity/stocks. If it above the number you have decided, do not add more equity exposure unless you have a strong conviction. If you invest directly in stocks, go for the extremely low-beta and low-volatility stocks if you are confused. Stick to defensive stocks, which become safe havens when there is a market crash. Avoid the midcap and smallcap stocks at any cost, because during a sell-off, these scrips will be easy targets for bears.
In case of indirect investments like MFs and ULIPs, it is better to go for hybrid funds that split money into equity, debt and even gold. You should also keep a lot of cash on your hands. Do not try to venture out in complicated themes, international funds etc. India is still a much better market to invest in. On the debt side, do not chase yields. Debt is all about stability and safety for your investment portfolio. Take exposure to AAA rated bonds or companies backed by a strong parent group. The important thing is to have liquid investments that you can buy or sell at a drop of a hat.
If You Are A Bearish Investor
If you are convinced the stock market party driven by bulls is in its last stage, act accordingly. Park your investible funds in non equity avenues and book profits in stocks where you think gains can vanish if the market corrects. It will be a tough call to sell multi-baggers. But you are the one who thinks markets will fall! Position your entire portfolio be it direct stocks or MFs/ULIPs to safe debt options. These are avenues where there is no risk of capital loss or risk of interest loss.
Consider keeping money in traditional investment options like small-savings schemes but be warned that those have long tenures. Sovereign gold bonds are a better option than buying physical gold or ETFs, because gold bonds pay a fixed interest irrespective of gold price movement. If you taking out money, consult your tax advisor to review tax liabilities such as long term or short term capital gains tax. New conservative investors can use asset allocation funds where the fund manager also has a bearish view, or else there is no point in getting into an investment where the manager has a 180 degree opposite view. Even in debt products, try to explore structures (such as systematic transfers) where money can be transferred into equity if and when you want. Bank FDs with smaller tenures can give you good returns, but post-taxes, the returns may be much lower. There are also non-convertible debentures or NCDs that pay higher interest.
The author is a financial journalist with 13 years experience