Sensex, Nifty down from all-time highs, valuations still rich; Here’s how you should invest now

Updated: October 02, 2021 11:31 AM

This has been a spectacular run for the Indices and the stock markets in general. Nifty 50, which represents the top 50 companies in our capital markets is up almost 60% since March 2020.

The odds have always been stacked against retail investors until now. Come to the rescue, ETF short for Exchange Traded Funds. (Image: REUTERS)

By Gaurav Udani

The one question which begs an answer and the one that is almost asked every day now, is,  “What should we invest in today?”

This has been a spectacular run for the Indices and the stock markets in general. Nifty 50, which represents the top 50 companies in our capital markets is up almost 60% since March 2020 and it reminds us of the frenzy we found ourselves back in 2000, 2007 and for that very reason, it is also scary to think of the bloodbath which followed. On one hand, there is this sense and feeling of missing out for some investors who were too scared to buy the wonderful dip in the markets back in the middle of 2020, on the other end of the spectrum are those who have gotten so used to the recent run-up of stock quotes that they have forgotten basic economic principles which suggest and have proved countless times in the past that markets always revert to the mean from extremes.

Before laying out what investors should do in current times, it is essential to touch briefly upon elementary asset allocation concepts.

As an investor and especially in India, one has 4 major investible asset classes, viz, real estate, gold, stocks, fixed income securities (FDs, bonds, etc.) which are accessible to retail investors.

Apart from Real estate, there is mutual funds for all other asset classes, which is a great place we find ourselves in because at a small cost one gets access to a professional team to do all the work for the investor and supposedly invest their capital with care and prudence.

The irony is that most mutual funds don’t end up beating the markets at any given point in time which makes the investor’s job of picking the right bunch even harder because he will not know which ones are going to do well.

Let’s summarise a bit, one has 4 asset classes to choose from, and the most accessible form to participate in them does not have a great track record of managing the investor’s money not to forget, some of them are very expensive and come with very steep expense ratios.

The odds have always been stacked against retail investors until now. Come to the rescue, ETF short for Exchange Traded Funds. Simply put, An ETF represents a bunch of stocks, most commonly an index. So NIFTY ETF would represent the Nifty index of 50 stocks, they are just like index mutual funds with 3 important distinctions-

  1. ETFs trade on the exchanges just like any other stock, so one would buy units Nifty ETF just like one would buy shares of Reliance.
  2. ETFs are 100% passive, there is no fund manager taking discretionary calls on what stocks to  purchase and what to sell. The fund manager’s job is to simply clone the underlying index which it tracks. Remember we talked about how most mutual fund managers don’t end up beating the markets, investing in ETFs would mean that an investor is buying the market itself.
  3. ETFs are very cheap, and most have expense ratios of under 0.5% some are even below 0.1%

It is no secret that whenever broader indices have flirted with a P/E ratio greater than 25, the following few years haven’t been too great in terms of returns. It is time for an investor to reduce his equity exposure and park his funds in a mix of Gold and Debt.

Take the ETF route and buy Gold ETFs, Liquid ETFs, this should be around 70% of an investor’s  portfolio today, stay invested with the balance 30% in equities.

For the equity component one can buy 3 ETFs namely-

  1. Nifty Next 50
  2. Nasdaq 100 ETF
  3. Nifty value 20 ETF

Several fund houses have their own ETFs representing the above indices.     Hence, this is how your portfolio should look like right now-

  • 35% – LIQUID ETF
  • 35% – Gold ETF
  • 10% – Nifty Next ETF
  • 10% -Nasdaq 100 ETF
  • 10% – Nifty value 20 ETF

As the market corrects which it will sooner or later, an investor should increase his equity exposure gradually.

(Gaurav Udani is the Founder and CEO of ThincRedBlu Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)

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