What investors should do now

With the stock market hitting a new all-time high, confusion among investors has also hit a new peak. While some believe that the bull market has finally started and will take the market to much higher levels, others are scared of a crash. Here are some tips from experts to help you make the most of the situation.
Don’t look at absolute numbers
Avoid going by absolute value of the Nifty, the Sensex or an individual stock.Compare valuations of stocks or indices with their earnings potential. Since earnings were moving up in the past three years, their valuation could have fallen during this period. The broader market valuation hasn’t hit the 2015 high yet.
Given that corporate earnings in the current financial year, are muted, experts are expecting a jump in 2017-18. “The Nifty companies are expected to report an earnings growth of 19-20% in 2017-18, partly because of the low base effect. Earnings growth in 2018-19 should be around 16%,” says Tirthankar Patnaik, Chief Strategist and Head of Research, India, Mizuho Bank. Hoewever, you should moderate your return expectations, despite the likely pick-up in earnings.
“The forward price-to-earnings (PE) ratio of 18 times, which is higher than the historical average, indicates that a large part of the expected EPS growth is already priced in,” says Patnaik.
Don’t change asset allocation
Though equity valuations are high compared to historical averages—and expected returns are low—experts advise against reducing equity exposure. “Despite the rally, equities remain relatively attractive to bonds and returns from equities are bound to exceed those from bonds over the long term,” says Sunil Sharma, CIO, Sanctum Wealth Management. Amar Ambani, Head of Research, IIFL concurs: “Bonds, property and gold are not attractive at this point.”
Also, there is no guarantee that the market will fall once it crosses the fair valuation zone. It could enter the highly overvalued zone before a meaningful correction starts. “We recommend investing in equities with a minimum three year view,” says Sharma.
A key factor that determines market levels is availability of funds. “Valuation is a bit high, but the current uptrend may continue as FII (foreign institutional investors) inflows, led by good liquidity in the global market, continue,” says Vinod Nair, Head of Research, Geojit Financial Services. Increased domestic inflows are further bolstering the market, with mutual fund SIPs attracting a large number of retail investors. There is new institutional money coming in, which is unlikely to be impacted by short-term market volatility. “Fixed monthly inflow is coming into the market from domestic institutions like the EPFO, and this will grow once the limit for investing in equity is increased from 10% to 15%,” says A.K. Sridhar, Director and CIO, India-First Life Insurance.
Continue regular equity investing
Since there is no reason to change your asset allocation, experts advise investors to continue with their regular investments. “One should continue to invest through their SIPs into core equity schemes,” says Manish Gunwani, Deputy CIO, Equity, ICICI Prudential Mutual Fund. These regular investments will help you take advantage of short-term volatility. “Equities may be volatile in the short term, but investors with a mediumto long-term horizon should continue to invest, preferably through SIPs,” says Rajat Jain, CIO, Principal Mutual Fund.
Stagger lump sum investments
The market is expected get volatile and, if you stagger your investments, you may be able to buy at lower levels. “Investors should hold their funds and buy on dips,” says Jimeet Modi, CEO and Founder, SAMCO Securities. The first trigger for this volatility can come in April, when fourth quarter corporate numbers start coming in. “Due to the likely not-so-good numbers in the fourth quarter, some correction may happen,” says Patnaik. Sridhar is also waiting for such an opportunity. “We are holding around 8-10% cash and waiting for the corporate results,” he says. The GST will be good in the long term, but its implementation can create short-term problems.
The directional change in inflation and the interest rate trajectory is another short-term worry for the market. “Some profit booking may happen due to the short-term worries, but Nifty may not go below 8,500-8,600, because of continued inflows from both domestic and foreign investors,” says Patnaik. If you are unsure of your ability to stagger your investments, invest in lowrisk products. “Dynamic asset allocation funds are best suited for lump sum investments,” says Gunwani. These reduce equity exposure when the market valuations are high and increase it when the valuations are low.
Reduce portfolio risk
Just because you have decided to remain invested in equities, you don’t have to hold on to a fixed set of stocks. Scan through valuations and dump overpriced stocks. The high market valuation is the average of highly valued stocks and reasonably valued stocks. So, you can generate a better Sridreturn than the index, if you invest in undervalued stocks or sectors. “Don’t bother about the index return. Select purchases from the broader universe will still offer attractive returns,” says Amar Ambani, Head of Research, IIFL.
Traditionally, the mid-cap segment is valued less than the large-cap segment. However, it is the opposite now. “It is better to avoid mid-caps now since the segment is overvalued. There aren’t enough reasonably priced stocks,” says Sridhar. Mutual fund investors can also follow a similar strategy—those holding small- and micro-cap schemes can switch to large-cap funds.
Stay away from penny stocks
Chasing penny stocks is a mistake many investors make during market peaks. They incorrectly assume that the risk in a stock priced at `2 is much less than in a stock priced at `2,000. You need to compute risk in percentage terms. If both stocks crash by 50% from current levels, your investment of `1 lakh will reduce to `50,000. And the likelihood of a `2 stock falling to `1 is much more than a `2,000 stock reduced to `1,000. And, as mentioned earlier, investors need to get out of the habit of looking at absolute price. “Stocks have to be valued based on the fundamental factors like management, financial performance and not the absolute price,” says Kishor P. Ostwal, CMD, CNI Research.
Penny stocks are mostly manipulated by operators and are best avoided. BSE has already put trading restrictions on around 800 penny stocks. Brokerages are also taking steps to protect their customers from penny stock manipulation. “We have made a ‘caution watch list’ for penny stocks, so that investors who wish to buy these stocks have to do much more research before making a purchase,” says Modi.
Control the urge to trade
During a bull market, there will be many stories of people making money by day trading or playing in the futures and options (F&O) markets. But trading is a specialised activity and requires in-depth knowledge. That is why V.K. Sharma, Head, Private Client Group, HDFC Securities is categorical: “Small investors should not trade.”
Buy portfolio insurance
Though small investors should steer clear of the F&O segment, it may become a necessity for large investors with a significant equity exposure. If your equity portfolio is reasonably large, you should consider using some portfolio insurance techniques to hedge the risk. “The uptrend is still continuing and since the market is yet to give any signal of a reversal, investors should follow less aggressive hedging strategies like bear put spreads,” says Sahaj Agrawal, DVP, Derivatives, Kotak Securities. In a bear put spread, you buy a put option for protection (say, Nifty at 9,000) and sell at lower levels (Nifty at 8,500) to reduce your overall cost.