The sharp run-up in equity markets brought a lot of cheer to the investing community. However, the recent volatility has given way to skepticism and circumspection, and talks of an 'overdue correction' have made investors reassess their investment strategy.
At this stage, the question uppermost in the minds of the equity fund investor is -- should I still be invested in equities? Those who want to enhance their equity allocations want to know if they should invest at these levels now or sit at the fence and wait for a more opportune moment later.
First we need to establish some facts right away to put to rest concerns on whether equity markets have overrun the course and have taken the shape of a 'bubble' as we have seen in the past. To be sure, fund managers are of the view that equities are not overvalued at these levels if we begin to address some critical issues.
Corporate performance is looking up, Indian manufacturing is acquiring a high degree of competence in the global context, domestic consumption levels should increase in view of the good monsoons and all this will have a cumulative impact on GDP growth.
Even the Reserve Bank of India has revised its GDP forecast (in the latest Monetary Policy in November 2003) to 6.5-7.0% (with an upward bias) from 6.0% in April 2003. So over the long-term there is some degree of consensus that the picture looks promising and this should reflect in the stock market.
Even if that builds a good enough case for equities, the current levels do not inspire a lot of investors to enter the markets now. Many investors are of the view that equity markets have run-up significantly already and there is little rationale in investing when the index is hovering around the 5,000 level.
When we asked Prashant Jain (head - equities, HDFC AMC) this question, he opined, "From a longer term prospective, while the markets are not as attractive as they were six months back, it would be correct to say that there is reasonable upside for the medium to long term investor."
The moot point is even if investors have to enter equities at these levels to reap long-term growth (lets say over 3 years) what is the ideal investment avenue that can take them there?
At the current level, we recommend that investors invest small amounts at regular intervals in equities (termed as systematic investment plans by the funds). Equity investments must be staggered over a period of time and not invested in a lumpsum. This will enable investors to lower their average cost of purchase.
Investors must also consider investing in balanced funds, including monthly income plans to have that fixed income hedge, which can play a stabilising role in their portfolios. When markets do correct, investors can shift some of these assets to pure equity funds.
Of course, one easy way to tide over volatility is to have the right "investment" mindset. Equities reward investors particularly over the long term, which is also what you should be investing for. If you wish to get over the jitters of volatility in the markets remind yourself that you aren't invested for a week or a month. Its only when you start behaving like a short-term investor (better known as punters) do you allow the volatility get the better of you.