What to do when Market is continuously rising

This week BSE Sensex touched 30,000 mark, Nifty has already crossed 9000. As the stock market is touching new highs, many of us get jittery about what to do some also get over excited in this market. SO what should we do in this kind of situation and how to avoid temptation and errors while making most in this kind situation.

1.  Numbers are not just numbers look behind them

If we just look at a number in isolation it does not gives any clear information. Time value of money and the basics behind the numbers are more important to understand its significance.  Similarly the absolute number of the Nifty, BSE Sensex or any individual stock may not give a correct picture. We should look at Valuations based on earnings, growth and other factors to determine the actual value of that stock or group of stocks.

2.  Asset allocation is the Key

It is true that equity valuations are currently high as compared to historical averages. Hence expected returns are less. Still if we compare equities with other asset class i.e. bonds, gold, real estate it remains relatively attractive over the long term period of three years and more.

Another factor that determines market levels is Cashflow in the market of funds. Foreign Institutional Investors continuously buying Indian Stocks and Domes Institutional Investors like Mutual Funds are also buying. In this scenario when we do not have any other better asset available we can keep on investing in equity market,  We understand that equities may be volatile in the short term, but investors with a medium to long-term horizon should continue to invest in equities, preferably through SIPs. A staggered approach for investments through SIP or STPs could be better way in this scenario.

If we have a large sum to invest, it is best to park the funds in liquid or ultra short term bond funds and do a systematic transfer to equity funds over a period of time. This may help to average out the purchasing cost over a period of time.

Another strategy for investments in this scenario could be dynamic asset allocation or balanced funds. In Dynamic asset allocation funds mutual funds reduce equity exposure when the market valuations are high and increase it when the valuations are low. Some funds reduces the equity exposure below 65% required for getting equity tax benefits through derivatives.These funds can also be looked at to reduce equity exposure while getting the tax benefits in more efficient way.

Corporate Results, inflation behaviour and the interest rate movements, implementation of GST are major factors which should be looked at in near future to seek the direction of the market.

3.  Understand the actual risk

Normally, the large cap stocks are value higher as compared to mid and small cap stocks. However, currently it is the other way.  Mid & Small cap stocks are value much higher as compared to the large cap companies. This could get corrected to its normal levels in near future. In this scenario its better to be more careful while selecting stocks or mutual funds so as to avoid potential risks.  

4.  Nothing comes cheap so be careful

When markets are at very high levels people get tempted to buy penny stocks assuming they may multiply in future. Some people think that if stock price of a a company is very little it means the risk is also little but this is not true. Ultimately the return is calculated on percentage terms. If a stock priced at Rs. 4 falls to Rs. 2 or a stock of Rs. 1000 falls to Rs. 500 the loss will be same. As a basic we should always remember that any company’s stocks has to be valued on the fundamental factors like business growth, management, financial performance etc. and not on the absolute price.

Further little priced penny stocks could also be easily manipulated by operators and are best avoided.

5.  Trading has more excitement than actual gains

We keep on hearing various stories from friends & relatives that someone has made lot of money by day trading or playing in the futures and options (F&O) markets. It’s not so easy and may not be always true. We should understand that trading is a specialized activity and requires lot of expertise and knowledge of the market. Small investors should better to keep themselves away from these temptations.

6.  Insure the risk

The large investors who have significant equity exposure can take hedging positions to reduce their risks in equity market. investors can follow less aggressive hedging strategies like buying puts at higher levels and selling at lower levels to protect themselves from significant falls along with covering a steep rise in the markets. 

When something goes to a new and uncharted territory, proper prudence and maturity is required to see beyond the current hype so as to not get carried away with it and also to keep the eyes on reality. The Indian stock market may be like that at this juncture hence we should keep our eyes and ears open while taking any kind of decisions in this market.