The Sensex has done it yet again. It crossed its previous peak and touched an all-time high of 15,007 points on July 6. It had hit its previous all-time high -- 14,963 points -- just a day earlier, on July 5.
The Indian economy is growing at a clip of 8.5-9 per cent on an average for the past couple of years. The Sensex -- an index that captures price movements of 30 select stocks -- is just a reflection of this growth.
And the Reserve Bank of India, India's banking regulator, believes the Indian economy will grow at 8.5 per cent in 2007-08.
But is that reason enough for you to throw your money in the stock market ring? Or should you sell what you had purchased at a lower price and take some money home?
Here are some questions you need to answer in order to make your decision.
What are the foreign institutional investors doing?
First things first. Foreign institutional investors, FIIs as they are generally referred, are the people with loads of cash. Actually, they along with domestic mutual funds, are the real movers and shakers in most of the stock markets around the world.
And if they invest money in a country by the loadful, as they are doing in India right now, it indicates their confidence in a country's financial well-being.
To cut a long story short, they have been buying loads of stocks in India. They have pumped in Rs 25,950.45 crores during the January-June period. That is Rs 4,325 crore on an average per month. When converted into US dollars, this figure stands at a little over one billion dollars (assuming $1 = Rs 41-42) every month.
The figure seems to suggest that the FIIs are buying like there is no tomorrow, which means this breed of investors believe in the 'India story'.
If they are investing such huge amounts of money when the Sensex is at its peak, it means there is scope for the markets to still rise (which means many shares will increase in value).
Does this mean all is hunky-dory?
No. The FII counterparts, the Indian mutual funds, don't seem to be following their footsteps. In the last six months ending June 2007, the Indian mutual funds have bought shares worth only a measly Rs 72 crore.
The rest of the money raised by the booming mutual fund industry is being safely invested in the domestic debt market. In the six month period spanning January-June, these mutual funds have invested a staggering Rs 28, 765 crore in the debt market. This betters the FII investment of $1 billion in equity markets.
The contradiction in the figures invested by two of the most leading players in the Indian stock markets paints a very confusing picture.
This is because, two of major players in the Indian stock market are investing in opposite direction. If the FIIs are gung ho on stocks, their domestic counterparts, the mutual funds, are not so keen on taking a risk here.
So, what should you do?
Let's see what the market experts are saying:
Ambareesh Baliga, vice-president, Karvy Stock Broking, believes the market has run its course for the short-term and needs to take a breather.
He expects the markets to touch somewhere close to 15,000 points due to the strong momentum. "However, we are not asking anybody to buy at current levels," he adds a word of caution.
"If the market (Sensex) corrects (falls down) by 1,000-1,500 point, then it could perhaps be a time to buy."
What about the contradiction shown by FIIs and mutual funds? Baliga offers his take: "The mutual funds are heavy buyers on the debt side because they have raised this money for the purpose of investing in the debt market."
There weren't many new fund offers, NFOs, in the recent past that raised money to invest exclusively in the equity markets, he adds.
However, he is bullish about the markets in the long-term as the India growth story pans itself out nicely.
Sumeet Rohra, an analyst with Tricolour Hedge Fund headquartered in Mumbai, too, offers the same view.
"I'd rather say that there are no issues with the markets. I feel that the markets may consolidate (remain flat) for some time before beginning their upward journey."
According to him, information technology heavyweights like Infosys, Wipro, Satyam and TCS (all of whom are part of the Sensex) are not supporting the market. "When they start taking part in the rise of the Sensex, we could see the Sensex climbing greater heights in the times to come," he says.
Why are the IT stocks not participating?
That's because the rupee is gaining in strength against the US dollar. And most IT companies earn their revenues in US dollars. So, if the rupee strengthens against the dollar, their revenues and profits decline.
This is how it happens: These companies would have Rs 43-44 ($1 = Rs 43-44) just a few months back for every dollar that they earned. Now, since the Indian currency is gaining in strength, they are getting fewer rupees for every dollar earned ($1 = Rs 40-41).
Remember, that the share price of a stock depends directly on its profits. Investors take any decline in profits rather seriously. If profits fall, share prices also follow a similar direction.
To understand this relationship, read Spot a good stock. Win big!
So, should you buy or sell right now?
Well, the facts, figures and what a couple of experts think about the general direction of the markets are in front of you. Whatever you do, always remember that investing in the stock markets to get good returns is a long-term bet.
Invest only in stocks/ companies you believe in; remember, they should be run by responsible people. It's mostly the quality of the management that either makes or breaks a company.
Investing in stock markets is always risky, irrespective of the position of the Sensex. However, at 15,000 points the risk-reward ratio is a bit skewed: that is, the risk is higher and the reward is lower.
The only precaution you can take is to play as safe as possible. This means you need to do your homework. Don't just buy a share because your neighbour is doing so. Buy because you believe in the company and are willing to stay on for the long haul.
In short, let caution be your watchword.
