IN FOCUS : What Should You Do In A Soaring Stock Market?

In a surprise move on January 15, 2015, the RBI cut repo rate i.e. the rate at which it lends to commercial banks by 25 basis points to 7.75 with immediate effect. As this was the first repo rate cut since May 2009, it brought cheers to the stock market. No wonder, the benchmark indices marked their biggest daily gains since May 9, 2014. While the Sensex rose 3.1 per cent to reclaim its crucial 28,000 level, the Nifty too gained around 3 per cent. Considering that the rate cut is likely to strengthen the positive momentum in the economy and kick-start the investment cycle, the stock market can be expected to do well over the next few years.

This rate cut also augurs well for the debt market and for investors in gilt and income funds that follow a duration strategy. Since there is an inverse relationship between interest rates and bond prices, declining interest rates boost the NAVs of these funds, thus providing attractive returns to investors.

Unfortunately, only a small section of Indian investors has been able to benefit from the surge in the stock market that began last year in anticipation of a BJP-led government coming to power at the centre. In fact, many investors who invested around the peak market levels in 2007 and 2008 have been selling their equity holdings at every rise in the market considering it to be an opportunity either to book some nominal profit or recover their losses. In other words, since equity is still not a widely accepted asset class among investing public, the retail participation has remained very low.

However, a current market like situation can make investors regret at having missed out on a great opportunity to earn handsome returns. The right way to tackle a situation like this is not to allow anxiety to cloud your investment decisions. Therefore, the question that needs to be addressed is what should those investors, who have stayed away from the stock market so far, do now?

First, it is important to understand that the Indian stock market has benefited from a significant change in the government that is working towards bringing about structural reforms to generate a significant boost to long-term economic growth. Therefore, the momentum towards growth and reforms as well as improving fiscal situation on the back of declining oil prices should continue to prop up the stock market. However, it is equally important for investors to know that given the stock market’s tendency to turn volatile every now and then, they must be prepared to face volatility from to time, even when the market is on its way up. In fact, the level of success that investors can achieve will depend on how they face these fluctuations going forward.

Secondly, the decision whether to invest in equities or not should not depend upon the current mood of the market. The key deciding factors should be an investor’s risk profile, time horizon, and investment objectives. It is a proven fact that equities have the potential to deliver much better returns than other asset classes provided one is willing to invest for the long term and follow a disciplined investment approach. The same principle applies in the current market situation too. Therefore, if you are one of those investors who are facing the dilemma of whether to invest now or not, the key decision that you need to make is about your asset allocation.

Remember, the right way to do so is to invest in an asset class like equity only when you are investing for achieving your long-term objectives like children’s education, their marriage, and your retirement planning. Since these are goals that require you to generate a large corpus, a combination of an asset class like equity and a disciplined approach of investing through SIP in options like diversified equity mutual funds can do the job for you. Also, investing a fixed amount at a fixed interval will take emotions out of your investment process and you will be able to tackle the market fluctuations in a much better way by averaging your investments over time.

If you not comfortable with investing a very high proportion of your long-term investment in equity funds alone, there is an option of investing in hybrid funds. There are a variety of hybrid funds on offer from mutual funds and you can benefit from them in more than one ways. For example, you can invest in equity or debt-oriented balanced funds. Then, there are funds that invest in a mix of equities, arbitrage, and debt instruments. As is evident, you can decide how much risk you can take to enhance your returns and then decide on an appropriate investment option.