Investors are seen caught in dilemma whether to continue investing in equities, or take some profits off the table.
Mumbai: It seems to be a million-dollar question - How to make investment in a stock market which is hovering around all–time highs?
Investors are seen caught in dilemma whether to continue investing in equities, or take some profits off the table, or switch investments into other asset class such as bond or debt markets.
It is a catch-22 situation for most investors, after Indian stock markets reached the 32,000 levels, and the S&P BSE Sensex emerged as one of the best performing equity markets in the world.
Indian investors should keep in mind that both domestic and global cues continue to remain positive; and this sentiment may keep stock markets buoyant over medium to long term. However, one cannot completely rule out market volatility as Indian equities have moved from fairly-valued zone to an above-average valuation zone. Hence, it’s important to comprehend what should be the optimum strategy at present market levels.
Mutual Funds for Value Creation
Historically, equities have out-performed over long-term against other investment asset classes in India as well as globally.
Investing in systematic investment plan (SIP) of a mutual fund scheme is best advised for the long-run, because when an investor attempts to time the stock market, he usually misses out on the rally, or enters the market at the wrong time – either the valuations have already peaked, or the markets are on the verge of a correction. Investing every month through systematic investment plan ensures that one is invested during the peaks and valleys of the market.
Let’s have a look at some history – Assume one had invested Rs.1 lakh each in Fixed Deposits, Gold, and Sensex in 1979-80 – the year when the benchmark index Sensex, came into existence with a base as 100. If one had kept his/ her investments till 2017, the approximate return of various asset class during last 37 years as follows – Fixed Deposits has multiplied wealth by 22 times, Gold by 32 times, and Sensex by whopping 320 times!
Mutual funds are best advised for accomplishing financial goals; they are specifically designed with diversified investment portfolios which reduces market risks and maximizes returns. Professional money managers ensure rigorous investment discipline to manage these equity funds. The investment managers devote more time and resources to monitor these investments, than an individual could, and tend to react less during short-term market sentiments.
The Changing Economic Landscape
Investors should draw confidence that India has entered an economic phase where one can anticipate strong earnings growth over coming years.
Corporate India has been going through testing times for over last 3-years for as earnings growth have remain largely stagnant, nevertheless, things are gradually recovering and projected to gain impetus going forward.
There’s also growing optimism among investors that interest rates may continue to hold lower and corporate India can significantly gain on interest costs. This blended with stable consumption demand, corporate India is poised for comfortable earnings growth of 15 – 20 percent in the forthcoming years.
Indian economy is passing through a game-changing epoch with the implementation of Goods and Services Tax (GST).
The government is also increasing its disbursements on infrastructure projects such as roads, power, railways, ports, etc. One can expect a trickle-down effect in the economy because such massive spending in infrastructure and other related sectors boosting the economic growth rate from current 7 percent.
Hence, investors should continue remain invested in equities and observe market discipline.
Investment Strategy in a Buoyant Stock Market
It’s all about prudent asset allocation decision, when it comes to long term wealth creation. A good asset allocation strategy helps one navigate the peaks and valleys of stock markets more effectively.
Investors, who are entering equity markets for the first time or not acquainted about asset allocation strategy can consider balance or hybrid funds, that aim at diversifying investments over stocks and fixed income instruments such as bonds and government securities. Interestingly, such funds can be used as a stepping stone into the world of mutual funds.
The equity oriented hybrid funds have delivered an average annualised return of 14.65 percent over 5-year period, and 9.55 percent over 10-year. These categories of funds have distinctly outperformed the benchmark index, Sensex that has recorded an annualised return of 10.9 percent and 6.14 percent respectively over the same period. The balance or hybrid funds are also tax efficient as they are considered under equity funds, even though they have a significant exposure in debt instruments.
The investment philosophy of these category of funds is about remaining invested in multiple asset classes and avoid market volatility in a specific asset class, through shifting investment position from one to another.
The balanced or hybrid funds are also ideal for investors who are already invested in equity markets and have medium risk appetite and endeavours for growth with certain degree of safety. In this category of fund an investor can allocate lump sum or invest via Systematic Investment Plan (SIP) at any point in time in a stock market cycle.
The declining environment of falling interest rates has improved the prospects of returns from debt portion of balanced funds, while healthy stock market environment gives a twin boost to these category of funds, which makes an ideal investment avenue for conservative investors who aim to generate long term wealth.
By D. P. Singh, Executive Director & Chief Marketing Officer, SBI Mutual Fund