Markets are high—Nifty crossed 10,000 for the first time and corrected thereafter. This market rally has been broad-based, driven by fundamentals. It can also be seen as an affirmation of the Indian economy’s strength and the potential it can scale. Our economy is at an inflection point; 10,000 or thereabouts on Nifty is just a milestone and the equity markets have a bright future ahead. Though the valuations at present are slightly above mean, the market is still far away from the frothy valuations that were seen in 2007-08. In January 2008, the Nifty had touched a high of 6,288; the Nifty earnings for trailing 12 months (TTM) were around 222. At current levels, the Nifty TTM earnings have more than doubled to 454. Hence, the valuations are far from stretched. No doubt, corporate earnings have been elusive for the past few years but as consumption improves, corporate earnings are also likely to improve. Hence, long-term equity investors should not hesitate from investing at current levels.
An investor has to judiciously plan her future by properly weighing her investment options and goals. For long-term goals, the investor should invest in equities, while for the short-term goals, one should ideally opt for appropriate mutual funds. Some mutual funds shift their asset allocation between equity and debt. As the interest rates for fixed deposits have been declining and are likely to consolidate at current levels or decline further, though at a slower pace, hence, it is advisable that only a minimum possible investment be there in these asset classes.
If we consider real estate as an asset class, it can act as a hedge against inflation, but it is also a play on demand-supply mismatch, especially in the urban parts of the country. Moreover, liquidity in the sector is relatively low. One must undertake proper study, especially of the developmental potential of the target investment, before committing, given the opacity associated with the asset class. Hence, real estate also does not emerge as prime vehicle to meet the long-term goals.
For long-term wealth creation, equities emerge as the best asset class among others given the ease of transaction, ample liquidity and good returns offered over long periods. Historically, equities have beaten inflation by a wide margin, thus enabling wealth creation. It is important to have exposure to equities, be it direct or through mutual funds.
When one embarks on a financial planning journey, one must try to ensure an early start and the portfolio should have an assorted mix of all types of investment vehicles but in varied proportion, depending on the goals and the end use. Risk profiling is equally important before putting your savings in a particular asset class. Finally, it’s your risk appetite that gives you the right direction whether to invest in a particular asset class. Risk profiling is also a function of time left for goal achievement. Long-term goals such as children’s education or marriage, and retirement planning can be met by investing in equities.
The next question that comes up is whether investing in equities at current levels is advisable?
Equity markets are slaves of corporate earnings, which in turn are driven by rising consumption or demand backed by price power in the economy. The government, being the facilitator of the economy, has identified a logical process towards restarting some of the lagging economic activity. The reforms being undertaken in India have been disruptive in structure and transformative in nature. Over the past couple of years, we have seen different structural reforms—goods and services tax (GST), Bankruptcy code, Aadhaar identification, law against benami properties, and autonomy for the central bank and its monetary policies for targeting inflation being implemented. The overall effect is expected to lead to a rise in the quality of life and consumption for the bottom of the pyramid, thus improving demand, which will further turn the wheels of economy. Thus, the India growth story is intact and going strong.
But the markets are volatile in nature; they never move in a unilateral direction. One should make use of the volatilities in the market to stagger purchases and create a long-term portfolio across different sectors. Diversification is equally important and hence one should not put all eggs in a single basket; equity investment should be made across sectors in both large- and mid-cap stocks with a higher share of large-cap names. Another way to invest in this market is through systematic investment plans (SIPs). The investor should identify the target stocks, which have growth potential and invest regularly through SIPs irrespective of price points. If the investor has additional investible surplus, she should make use of any correction in the market to invest more for the long term.
The recent sharp volatility on account of geo-political tensions is an example of how the markets tend to behave in response to any event that may or may not have any impact on the economy. Historical evidence suggests market corrections in these types of situations are ideal opportunities to pick quality stocks. An investor should be ready with the shopping list and can use these types of opportunities to invest in fundamentally sound companies managed by capable management and good growth potential. If this is too difficult to do, seek an expert’s help.
Arun Thukral is managing director and chief executive officer, Axis Securities
First Published: Mon, Sep 18 2017. 04 53 PM IST