Volatility, uncertainty, herd mentality, fear, corrections, opportunities, risk and returns — some of the most commonly used words, heard from the portfolio managers over the past month. The markets have oscillated, equity – the shunned golden boy has now returned in favour, debt and fixed income still hold their predictable places, gold is shining again, private equity knocking on investor’s doors and real estate- well it’s still around.

According to a private banking investment advisor, “The herd mentality has set into the markets again. People so far weary of investing at the 8,000-levels, yet now at the 17,000-levels the equity space is more exciting then ever. Gold, too, is gaining certain prominence especially with the weakening dollar and the jump over the $1,020 level. However, at this time one has to be cautious as well, as the market is like an erratic animal. When the markets are moving in the green, people are over-enthusiastic. Therefore, if one is holding equity, profit-booking is a good idea, and one can invest more towards fixed deposits (FDs), monthly income plans (MIPs) or gold.”

Correction blues

The market at its current levels has a PE of 23-24. In 2007, when the markets reached the 21,000-level, it had a PE of 26. So the fact is, the current markets are already over-stretched. So will the correction happen? Yes. That seems to be the unanimous answer amongst market players. However, probing further to find out when or at what level and to what extent it will happen, leave most hard pressed for answers. With this being the case that the markets will undergo a correction, and while they remain so volatile, two rather interesting options are thrown up for investors to make the most of this period.

One of the obvious factors, that every investor should look into is profit booking. However, unlike profit-booking in a way that may disrupt the overall portfolio, private bankers opine, “One should use the correction phase of the market to drop certain profit making stocks from their portfolio at a high. Dropping A-list or long-term oriented large-cap stocks is not necessary, but the mid-cap and small-cap companies which one has, can be sold. The nonfront-liner stocks should be booked and the money made can then be re-invested into more long-term stocks or fixed deposits, gold or even real estate.”

The other option which investors are now beginning to consider and use actively, is momentum trading. “Investors are now open to the idea of using a small portion of their portfolio for momentum trading, which makes use of, every rise and drop in the market and stock prices, possible. About 5%-10% of one’s portfolio is given towards this trading activity which can be done from time-to-time.

While investors were firmly of the opinion that long-term investing was the only way to make money, now-a-days they are more actively seeking out advisory and professional help to try and use market volatility to their benefit. The mechanism used is basic— one buys into mainly large-cap stocks and sets up a stop-loss option of say 5%, so as to not sustain too much of a loss. As and when the price goes up beyond say 5%-10%, one sells and every time it falls, you buy. This kind of investing can give post-tax and brokerage returns of 2%-3%, with an annualised return of up to 23%-24% even!” revealed a source from the investment advisory section of a multinational bank.

Portfolio options

Currently, the options being actively looked at, in terms of portfolio building are, equities, debt, FDs, real estate, gold, private equity and the IPO sector. Talking about IPOs and the risk and rewards associated with these investments, Sastry, country head, Firstcall India Equity Advisors Pvt. Ltd, said, “In IPO investing, the fundamentals, track records of the company and promoters, the contemporary strength in the business plan in context to the future, play a big role in judging the company. If you take companies that are now coming into the market or that may come out with an IPO soon, some of the promoters of these firms have always remained private over the years. They raise debt and stay out of the primary market space. However, with global competition picking up and some Indian companies, which have made good use of the capital market’s booms to expand and grow their companies, have surpassed these promoter driven firms, who are now feeling the pinch. And so even though they may have had very few outside investors earlier, they are now compelled to go in for IPOs in order to expand and diversify. Hence many have now taken this bold step forward. However, one must realise that having being private for so long these companies may not have the level of transparency and corporate governance or regard for investors that other public firms do, and so they will need to adjust to these different things.”

The debt market is supposed to be a very good long-term buy; this is a 2-3 year horizon. However, if one buys into SIPs or debt funds for one year, then they should get good returns. Also, from the short-term perspective, an MIP is a good idea, as the product has an healthy blend of equity and debt. The interest rate is likely to go up in the coming months and inflation as a risk is returning as well. With this being the case, parking excess or safety money in debt instruments is a good idea.

Gold, the opinion all around remains that is by far the most attractive safe alternate investment to make, and should be a part of one’s portfolio. Gold can be bought both in the ETF section and as an commodity as well, and with the fundamentals like weakening dollar and global uncertainty being prevalent, having 10% of your portfolio in gold is an excellent idea add wealth managers.

As far as the real-estate markets go, the market consensus is look, but with caution. The prices in certain areas of the country have no doubt corrected themselves, but in a majority of the regions, they remain over-priced. Buying property for residential is a different matter, however, as an investment one should be a little more careful. With a host of real estate IPOs slated to hit the market later this year, liquidity amongst the building community will be high, and in that case they may continue to keep prices overvalued for a little longer.

Private equity, on the other hand, is making a positive come-back. While wealth managers are divided as to whether to consider PE an alternate asset class altogether now, or to club it as a sub-section of equity investing due to the high risk and high reward nature of both asset-classes. With some funds giving annualised returns of between 25%-40% , investors are now a lot more interested in getting in touch with their private bankers to seek out the latest in this area.

“Investors have learnt lessons from the not so recent past and are maturing. However, the herd mentality still remains,” explained a private banker with a leading Indian bank. People are now maturing as investors and as long as one does not loose one’s head or get caught up in the overexcited frenzy of the markets, the opportunities are available.

The risk is getting carried away and sustaining avoidable losses, but the opportunities in various segments are there to be exploited as well. ‘Buy what fits into your portfolio and needs, keep a little away for speculating if desired and don’t get greedy,’ seems to be the mantra being chanted this Diwali.