Equity markets are at an all-time high currently and a vast section of the retail investing community is reluctant invest at this juncture, fearing a correction or a possible reversal in trend. But to properly gauge the risk and reward present at the moment, it is important to understand the current developments in the right context.
In the last one year, the equity benchmark Nifty has outperformed global markets and has given a return of 18.5%, whereas S&P 500 has delivered 15.5% and MSCI Emerging Market index has delivered 16.5%. “Apart from this, Indian markets have outperformed almost all other markets in the world, barring Brazil. Although economic growth rate has not improved as expected, the overall GDP has witnessed growth. Positive offshoots are visible and there is a leap of faith in the reforms that are yet to come. The RBI has been very vigilant with interest rates and has kept them low enough to spur credit growth in the economy and simultaneously reduce the debt burden of corporates. This accommodative stance by the RBI is helping stabilize the markets to a great extent,” says Tejas Khoday, Co-Founder & CEO, FYERS, a thematic investing platform.
The P/E ratio of Nifty is currently 23.63, which is only slightly above the historical average. Considering market participants are expecting the promised reforms to be successfully implemented by the Modi government by 2019, there is still headway left for rise in stock prices and hence, these valuations cannot be termed as excessive.
After the government imposed 10% tax on dividends in excess of Rs10 lakh in the hands of shareholders, cash-rich companies have resorted to share buybacks instead of declaring dividends. “In FY2017 a total of 49 companies bought back shares over 34,500 crore. As it can be clearly observed, companies are discouraged as 3 levels of taxation (Corporate tax, DDT and additional tax in the hands of the recipients) are seen as burdensome. The effect of share buybacks is generally positive for the stock markets as the total number of shares are reduced and thereby increases earnings per share and subsequently boosts the valuation of the company further. A good development on the taxation front is that the finance ministry wants to end the retrospective tax on cross-border investments,” informs Khoday.
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Considering that foreign investors (FIIs) comprise of approximately 40% of the total free float market capitalization of the Indian stock market, an appreciation of the Indian rupee is favourable to their dollar returns. In the last one year, the rupee has stabilized and has been among the best performing currency which has helped the performance of our stock market to a large extent (depreciation of a domestic currency scares away foreign capital).
In the meanwhile, the share of domestic institutional investors has increased substantially primarily due to large equity mutual fund inflows from retail investors since 2014. Until previously, withdrawal of capital from foreign investors used to be a death knell for the stock market rallies, but in recent times domestic fund flows have been strong enough to offset the negative effect. A balanced environment such as this is healthy for equity markets in the long run and encourages the investing sentiment among all market participants.
“Until 2018, there are no state elections and after a ceremonious victory in the recent elections in UP and other states, the BJP government is poised to deliver great reforms in the coming two years and any positive developments will provide tailwinds for the stock prices going forward. Moreover, upcoming initiatives such as GST, Make in India, Smart Cities Mission, Digital India Programme and a slew of other agendas can spur earnings growth of India Inc. Considering all this, equity markets are poised to go up in the foreseeable future,” says Khoday.
Should You Invest?
Experts say that while it is certainly true that markets have gone up smartly over the last few months, but this is still the beginning of what is very likely to be a multi-year bull run. So, while the golden opportunity to invest was in last November when the indices were correcting, but it still a good time to put your money into stocks.
How and Where to Invest?
“There are various ways of investing and taking advantage of the boom in the stock markets. If you are an experienced investor having research capability or access, then go for stock-specific ideas. This is clearly a stock picker’s market. So, investing in well researched stock picks can generate mind-boggling returns over the next few years,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
However, if you do not have access to quality research, then simply invest in the frontline indices – Nifty or Sensex. This can be done by investing in an index fund or an ETF (Exchange Traded Fund). Before investing one should verify the index which the fund is tracking and compare the expense ratios with other similar funds. Indices will generate steady returns if the markets do well. Moreover, you remove risk of human error by selecting an index fund as it involves passive investing in the index stocks only.
However, “if you wish to go for higher returns then go for actively-managed funds. In this case you need to carefully examine the investment objectives of the scheme which you are investing in as well as the track record of the fund manager. A qualified adviser to help you with your investments would be certainly desirable in this case. Here again you can opt for a Systematic Investment Plan (SIP) or a Systematic Transfer Plan (STP), depending upon whether your investable surplus is a lump sum or will be generated at regular intervals,” says Kapur.
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Investors may also opt for thematic investing. “Although mutual funds are the regular route for most new investors due to ELSS tax benefits, for investors who are seeking higher returns, the best way to invest is by buying pre-researched and simplified portfolios which are available via thematic investing. This is the most customizable and hassle-free method of investing in Indian stock markets,” suggests Khoday.
Thus, whichever option works best for you should be chosen. However, market experts advise investors not to postpone their investment decision as there is no way of predicting if and when a correction will happen in the near term.