“Markets at Highs: is it still a good time to invest?’’

The markets corrected slightly over Sept 23 and continued the sell off in Oct 23 due to FII outflows out of Equity markets. FIIs net sold nearly Rs. 19k crs in Sept and have till date sold Rs. 5k crs in October. This sell off did not have that big an impact as DII’s pumped in nearly Rs. 20k crs in Sept 23 and have bought worth nearly Rs. 3k crs in Oct 23.

JP Morgan recently announced India’s inclusion in the Government Bond index- emerging markets from June 24, lets look at the positives and negatives of this:

Positives:

• Lead to higher inflows from foreign investors into India’s Sovereign Bonds
• India’s cost of funding will reduce as it gets access to Global capital
• The Rupee will hence benefit with the reduced cost of funding
• The Government will be forced to perform better as slippages in fiscal targets would lead to outflows

Negatives:

• With global inflows will come dependency on global financial conditions which would result in volatility
• Outflows will be evident incase of missing Government targets

The JPM index inclusion may follow inclusion in other indexes too, like Bloomberg, FTSE Russel etc.

This month we focus on the important question in everyone’s mind “Markets at Highs: is it still a good time to invest?’’

The equity markets have had an impressive run after the pandemic in India. The Indian economy has shown tremendous resilience and strong fundamentals to back this growth. As of today, India continues to be a bright spot globally, being the fastest-growing large economy. As the rise of India continues and market is scaling new peaks. The last few years have attracted a lot of new investors to the markets and they would likely be sitting on impressive returns.

However, for new investors and those sitting on the sidelines and on good profits, one might expect a few silent questions in mind. Is it the right to put more money? Should I book profits partially? Would this market trend continue and for how long will it continue? In this article, we will try and lay down the basic principles on which we can find answers to such questions, irrespective of the market level or cycle.

Setting the right approach to investment decisions:
We do not have control over what the markets will do or have the ability to predict the same over the near term. However, what we know with a reasonable level of confidence is the long-term prospects for the Indian economy, and what we can control are our investment behaviour and our investment decisions. So the focus should be more on what we can control and our own needs. Here is a broad framework to set the right approach to investment decisions…

1. Focus On Financial Objectives:

What matters to you is not the market levels but where you stand today with regard to your financial goals. The focus should always be on your financial and life goals. Thus, one should automatically make investment decisions based on your needs. This will immediately give you answers on the investments required, the investment horizon, and the suitable asset class exposure based on your risk profile. Your exposure to different asset classes, including equity, should be clear once this exercise is done properly. Whatever happens around you and to your portfolio, remember to always keep an eye out for the impact and the status of your financial goals.

2. Focus on your Asset Allocation:

Often people miss the big picture, and focus on pennies, ignoring the pounds. Following the asset allocation approach at the portfolio level or at a more granular, need level, is the ideal thing to do. Simply put, one needs to find the appropriate asset allocation and review the same periodically or after sharp market movements. One may adopt a fixed or a tactical asset allocation approach depending on your understanding and experience. Once this is clear, it can provide a lot of information, such as when to buy, sell, or rebalance assets.

3. Diversify your investments:

Once your asset allocation is decided, one can explore mutual funds as an ideal vehicle for investments as exposure in these asset classes can be easily managed with mutual funds. Within mutual funds, there is a wide choice of funds that offer different levels/natures of diversification. By diversifying your holdings, you reduce the risks connected to the specific type /nature of investments. Diversification and professional management of your investments are the key benefits that mutual funds offer.

4. Set Reasonable Expectations & Not Chase Performance:

As investors, we should also remember that past performance may or may not be repeated in the future. Markets can be volatile, and behave like a pendulum in the short run, but in the long run, they tend to be more like weight machines. Research studies have also shown that the top-performing funds tend to rotate over different periods. Any decision purely based on performance-based rakings and returns, thus can back-fire. Setting our expectations on such past performance is also not wise. What is more important is the quality and consistency of good returns rather than just returns /performance itself.

5. Focus on Discipline rather than Market Timing:

Numerous studies have shown that the ability to time the market or market timing, often rarely contributes to your long-term performance. What contributes the most is your asset allocation decisions. Further, the time in the market is more important than trying to time the markets. Thus, as investors, this approach is something we should avoid and instead focus on being disciplined in our investments. Regular, systematic investments with SIPs have proven to be the ideal approach to making new investments at any market level. There is an element of rupee-cost-averaging or automatic timing inherent in this approach. Further, for fresh lumpsum investments, just focus on getting the time horizon right, i.e., invest for long-term, for at least 7 to 10 years with reasonable confidence.

6. Consult us:

Even though we have broken down and tried to simplify a lot of things, managing investments by yourself is not easy. Just like we have professional help in every aspect of our lives from doctors to accountants to lawyers and even your home cook, having a dedicated finance manager can ease a lot of things and help you get the right guidance. Our real role will be to hand-hold you in turbulent times and help you avoid making costly investment mistakes. We would be like your partner, helping you in every decision-making process and in managing your portfolio, during your entire journey.

Bottom Line
Markets will hopefully continue to see newer highs and some lows and with bright prospects, in the years and decades to come. As investors though, what matters is how we can best take advantage of this lifetime opportunity of the Indian growth story. At the micro level, irrespective of what happens around us, what matters to us is what we do and continue to do in our lifetime. Staying grounded, and going back to basics, even though it may appear boring or less exciting, is what will matter in the long run. A few percentage points up or down today will hardly matter a decade later. The focus, in the end, should always be on identifying, planning, and achieving our life's goals for ourselves and our beloved family members. That is where your 'real' performance in life will be judged.