The year 2017 seemed to have started on a tepid note for the equity markets. The country was still reeling from the demonetization-effect while the world was trying to come to terms with Donald Trump's victory in the US presidential race.
However, equity markets have a proclivity to surprise us and flip trends, often when we least expect it. Three years ago, May 2014 is when it all started. After nearly 30 years a single party came to power at the Centre which was positive for the Indian stock markets. Since then, the equity markets have rallied nearly 40% and conquered new highs.
So far this year, the Nifty-50 has made six new highs, leaving many investors on the sidelines. It can be a long wait for those waiting for a major correction to enter the markets. Since for every buyer there is a seller, the same way for every investor who believes that the market has topped out there is one who believes that we are at the cusp of a long and sustainable bull run. Trying to time the market can often be a futile exercise as capturing the tops & bottoms of stocks is near impossible.
As markets keep soaring, the question on everyone's mind is "what to do next?" Investor may consider the following options:
Stay invested: For those who are invested in the stock markets either directly or through mutual funds, it can be very tempting to book profits. However, investors may consider staying invested in their investments and being patient, to reap long-term gains. As per research done on the American stock markets, bull markets last on average about 97 months each and gained an average of 440 points in the Standard & Poor's 500 stock index. By comparison, bear markets since the 1930s have an average duration of only 18 months and an average loss in value of about 40%. This indicates that it is not always necessary to try and time the markets. As long as you stay invested over longer periods of time, your investments are likely to see growth.
Start a systematic investment plan (SIP): For those investors who are apprehensive to enter the equity markets at current levels, slowly dipping your toe into the market, would be a good strategy to adopt. Instead of taking large exposures at one go, you may choose to enter the markets slowly and systematically, by allocating a certain amount of money to equities on a periodic basis. It can help in rupee cost averaging and to take care of volatility due to various market cycles, as the investment is made over a period of time.
Initiate an systematic transfer plan (STP): For risk-averse investors, who are usually more comfortable with debt investments may consider to initiate STP. The investor may choose to transfer a fixed sum from his debt fund into another type of fund, i.e. a balanced or an equity fund or go for a capital appreciation STP where only the capital appreciation from the invested fund can be transferred to another fund. This helps your money to remain in a relatively low-risk asset while at the same time a portion of your portfolio can benefit from rising equity markets.
Invest some amount in good performing, quality funds: For those investors who have the ability and willingness to absorb higher risk, they may consider to increasing their exposure to equities. This could either be done by directly investing into equity markets or through investments in equity mutual funds. While exposure to equities is likely to increase portfolio volatility, investment in quality stocks can help cushion that volatility. However, it is important to note that in bull markets most stocks may witness gains. Thus, an investor should endeavor to invest in quality stocks and funds, which have exhibited a good track record and have a reliable management at the helm.
SAFE YET LUCRATIVE
- Investors with low-risk appetite may choose systematic investment plan
- Debt investors may go for systematic transfer plan (STP)
- STP helps money to remain safe and grow when markets rise
- Investment in quality stocks can help cushion market volatility
The writer is senior fund manager – equities, BNP Paribas Mutual Fund
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