Stocks are on a roll, and how! The Sensex and the Nifty are hitting fresh records each day for reasons both fundamental and speculative. However, this is the time for new investors to be very, very cautious. Time and again -- during 1998/99 and 2007/2008 -- investors who entered a red-hot market with the intention of making a quick buck ended up burning their life's savings.
So, can you still join this party? Read on!
While equities remain the way forward for long-term savers, the path to be taken is fraught with hurdles. Both the Sensex and Nifty are hitting new records on heavy liquidity in the system, a shift towards investing in equities versus other assets coupled with positive announcements from the government. Savvier investors, who have experienced this kinetic upward thrust, are using every rally to partially book profit and move to cash.
Traders and new investors are, however, ignoring massive headwinds that the market is facing. Among them:
1. Tepid earnings from frontline stocks.
2. Global oil prices moving up to a 3-year high.
3. Major indices moving into the `expensive' zone based on price-earning ratios. Thousands of crores of rupees moving into a select few stocks and pushing their prices to stratospheric levels.
4. The so-called penny stocks - which have dodgy managements -- have surged sharply as newbie investors bought into their `relative low prices' in a bid to ride the bull-run.
5. Rising inflation and consequently little or no chance of interest rates moving lower.
6. Foreign ownership of frontline stocks reducing in favour of domestic institutions. Although, this is not a bad thing in the longer run. Ideally, Indian portfolio investors should have higher stakes in bluechip companies compared with overseas investors.
7. The demand for virtual assets like cryptocurrencies, which are purely speculative and have no underlying economic rationale, has shot through the roof. The bubble seems to have seen a mild puncture there.
8. The banking NPA problem is far from over.
9. Lastly and, most importantly, celebrations of the market hitting record levels are seen everywhere. They are on the front page of every newspaper, financial website. Talk about what to invest in and what to buy is dominating drawing rooms and everyone wants to get his/her financial portfolio checked with a so-called expert to see if s/he hasn't `missed' the rally. I myself get several calls a day.
So, if things are so bad, why are the markets rising the way they are? What prompts a 1,000-point increase in the Sensex to beyond 35,000 in less than 16 sessions?
Well, here are the things that are going well for our markets:
1. There is a larger shift towards financial assets as savers move money away from fixed deposits, real estate and gold purchases. This rising tide of liquidity into the market is propelling prices and valuations higher. In the longer term, this is the best thing that is happening. Equity ownership is a minuscule 2 percent in India.
2. Investors believe eventually the economic steps being taken by Prime Minister Narendra Modi will bear fruit even if they deliver short term pain.
3. The advent of Goods and Services Tax will change the business landscape of India, delivering a tax bonanza for the government.
4. Top flight Indian companies are among the very best in the world when it comes to financial prudence, marketing skills and a deep management bandwidth.
5. While Indian markets themselves may be on shaky ground, they are among the top tier globally: to borrow a phrase from traders: India is a good girl on a bad street!
So, coming back to the moot point: how should you make money without burning your fingers? Well, here is a prudent financial plan:
1. Don't buy individual stocks. Chances of a strong correction are high and that could wipe out 20 percent of your capital in a very short while.
2. Buy a simple equity diversified fund. Do not go in for a sectoral fund.
3. Invest piecemeal: go in for monthly investments in an equity fund. Start a SIP.
4. Don't invest through a bank or an advisor. Their cut will reduce your overall earnings.
5. Choose the direct route of approaching a fund's website and go for the 'growth option' in an equity diversified fund.
6. Lastly, have modest expectations for return: we are already in the 7th year of this bull run.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)