Creating a new normal…

The Indian markets have been scaling new highs with NIFTY remaining above 10,000 for over a month. The current rally in Indian market is fuelled by strong liquidity from domestic investors. As strong inflows continue into domestic mutual funds reforms initiated by the Modi-led government reaffirm the faith of foreign investors ( as evident from a rating upgrade from Moody’s) in the India growth story which could well stay for another 7 years.

Domestic mutual funds continue to attract flows from investors with assets under management (AUM) of the industry increasing by Rs.51,148 cr in October to touch a new high of Rs.21.41 lakh cr. As per data from the Association of Mutual funds of India (AMFI), equity-oriented mutual funds (including arbitrage funds), balanced funds and equity linked savings scheme (ELSS) funds saw net inflows of Rs. 21,900 cr in October. In September, these funds saw inflows of Rs.27,077 cr. For the first seven months of the current financial year, cumulative inflows into these funds have tripled to Rs.1.51 lakh cr as compared to Rs.46,840 cr in the same period of the previous year.

Foreign institutional investors (FIIs) who took a break from buying Indian shares in August and September are returning after recent government announcements such as the Rs.2.11 lakh cr PSU bank recapitalization plan. Over October and November so far, FIIs have invested a net of $1.9 bn in Indian equities. US-based Moody’s on 17th November upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with a stable outlook citing improved growth prospects driven by economic and institutional reforms. This is expected to further boost FII investments into India. For the year to date, they are buyers to the tune of $7.4 bn.

September quarter results for most companies have already been declared & results have largely been in line with expectations. After its muted performance in the June quarter due to the transition to GST, India Inc is getting back on track going by the September quarter results. Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover over the next few months will also be closely monitored. With real estate and gold giving subdued returns, investors have been looking at equities as an investment avenue. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.

The markets seem to be consolidating above the 10000 NIFTY mark. Corporate performance & economic data which comes in H2FY18 will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus the general expectation is that H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

How much to invest in Equities

One of the initial investment decisions that one has to make is what proportion of assets to invest in equities & what proportion in debt.
One of the basic thumb rules used over the years to decide on equity allocation is the 100 minus age allocation. The risk taking capacity of a person is maximum at a young age & keeps declining as the person gets older. Thus one should subtract the current age from 100 & invest that proportion in equities & the balance in debt.
This is just a basic thumb rule for guidance. It does not align with the financial goals of a person which are the actual purpose of creating a financial portfolio & building a corpus. Thus this rule may be a good starting point but various other factors like life expectancy, age of retirement, financial goals, other liabilities & risk profile of the investor should be considered before making the asset allocation decision.
Investment in equities can be done in various ways:
1. Invest directly into equities
2. Invest through an equity mutual fund ( again the fund can be diversified large cap focused, mid/small cap focused or sector focused & the risk-return will depend on the type of fund invested)
3. Invest in a Hybrid Mutual Fund (Balanced Fund/ MIP) which invests a proportion of your money into equities
Equity investments should always be made with a long term horizon of at least 5-10 years to mitigate risk. The short term fluctuations in the economy tend to even out in the long run & thus the higher the time period of holding the lower the risk. Also equity investments should be as diversified as possible not only across funds/stocks but also across time periods. As the saying goes ‘Never put all your eggs in one basket’. Thus one should ideally do a systematic monthly/quarterly investment in 4-5 mutual funds or 10-15 stocks or a combination of both and stay invested for more than 10 years.
One should always take specialized advice for building up your portfolio as per your profile & goals. Given a gradual increase in life expectancy globally over the years, investment in equities have gained importance to ensure that you get more out of your hard saved money and your money lasts longer than what it did previously.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’