Oscillating between the bulls and
the bears.
When we trek the mountains , we
are at ease from the base to a certain height but as the mountain gets steeper
not only the air gets thinner but also the area of free float i.e. the foothold
area starts becoming meager until a
point comes when one wrong footstep could mean
near death fall.
Stock markets are akin to this
mountain trekking where unfortunately most investors watching the markets from
the sidelines are tempted to take the plunge awed by the scathing speed, wanting to cash in and in fact end up joining nearer to the peak. In the bargain with
lack of experience instead of making money, face a huge fall.
The Nifty has recently touched a
high of 5949.85 crossing decisively the April 2011 peak and is perhaps heading
for higher levels. As the markets gather steam, the bulls shed their horns and
transform into an Arabian horse or an ostrich to speed past all earlier
peaks whirl winding in its fold all those who are on the
sidelines, witnessing the rise.
However let us take stock of two
things:
1. It took the
market almost one and half years to cross its earlier high
2. This rise is on
the back of a low of 4788.95 touched
on18th May 2012
Thus the markets have surged 24 %
in the past seven months. The next peak of 6181.05 scaled on 4th Jan
2011 would mean that the Nifty can yet again surge another 230 points or 3.88 %
from the current high.
At the same
time we all are aware about the volatility of the equity markets. The question
is whether to wait for that 3.88 % rise or to book profits now. If we take
stock of the current global cues, we find that Market had remained cautious
over the debt issue in Greece and Spain for the major part of 2011-12. However,
Greece’s steps towards addressing its debt concerns and Spain’s formal request
for banking sector bailout have provided some respite.
Markets would
be closely watching the progress over the impending US fiscal cliff for further
cues going ahead. Though bouts of uncertainty both in US and Eurozone might
support the strengthening of the dollar which would in turn mean the weakening
of the rupee. This could make the equity markets vulnerable.
Cues from China
and the seriousness on reforms by the Indian Government have helped the markets
so far but the pall of lingering gloom is still not averted.
Yet many
experts have opined that risk sentiment is expected to improve going forward
amidst expectations that the fiscal cliff would be eventually averted. This is
a huge positive for the market.
On the other
hand with yields on fixed income instruments having reached their peaks and now
at best expected to soften in the next few quarters or at worst expected to
remain static, there is a high possibility of performance improvement in Debt
Funds.
Hence it is time to review the
asset allocation. It is common experience that the novice investors are fully
invested when markets are at their bottom. When time is ripe for investing,
they do not have any investible funds left in their kitty. A disciplined approach to investing also
entails booking of profits at various levels so that one is not lulled into the
cycle of greed & fear.
Given that we
have to live with the volatility of the markets a dynamic asset allocation can
help investors to achieve their goals within the estimated time frame.
·
It is now advisable to book partial profits in equities and shift to debt
funds. It would auger well to shift 30 % of your current equity portfolio to
debt funds. Agreed that it would be a lost opportunity if markets surge another
4 % or higher. However let us not forget that markets never trend upwards in
one straight line. They tend to halt, correct themselves in the interim before
the long haul giving ample opportunity for the investors to invest again at the
troughs.
·
Another avenue for investors in the 30.9% tax bracket is to shift part of
the equity portfolio to invest in tax free bonds. With a coupon of about 7.69% ,
it translates to pretax yield of >11 %
- a yield that no bank offers and can be locked up for a 10 year
horizon. With listing and liquidity these bonds are freely tradable. So if and when
bond prices surge and are expected to peak out, investors can again shift back to
equity. Thus there is no compulsion to lock in investments for 10 years.
·
Investors could do well to book 50 % profits for the amounts invested
during the fall of Aug 2011 – Dec2011 as depending on the point of entry, they
would have earned an annual return of anywhere between 14% to 24 % and also
qualify for long term capital gains.
·
Shift SIPS partially from equity to Gold
or Debt Funds: While SIPS are an excellent tool for averaging in falling
equity markets, in a rising market , they tend to buy into equities at higher
and higher prices – a strategy that in fact harms the long term goal.
Happy Investing!
Anagha Hunnurkar
December 16, 2012
