The benchmark Sensex slipped over 3000 points in the last two weeks triggered by the new Covid variant in South Africa, valuation concerns in the Indian equities and tapering of bond purchases by the US Fed. Investors are dumping Covid-sensitive stocks and foreign brokerages have downgraded India early this month on high valuations as the Sensex forward one-year price-to earnings (PE) is at 21.76, higher than five-year average of 19.13.
While the focus of foreign institutional investors have been shifting from premium Indian equities to relatively cheaper markets indicating profit booking—last week they sold Indian stocks worth over Rs 23,000 crore—existing retail investors should not assume that the recent historical returns will be repeated—the three-year SIP returns on the Sensex is at a 10-year high—and new investors should tread with caution and not get lured by the high returns earned by their friends and be fearful about missing out.
As the markets are expected to remain volatile because of the uncertainty around the new Covid variant, equity investors must book profits now, invest in dividend-paying stocks, tread with caution while investing in initial public offers (IPOs) or new fund offers (NFOs) and accumulate quality stocks on dips.
As the stock prices have moved up, investors should do some profit booking and invest the money in debt. Experts say investors should bring down the exposure to mid-cap and small-cap stocks and increase exposure to large-cap stocks. Mutual fund investors should look at balanced advantage funds as they can help mitigate market volatility and returns on such funds are more dependable over longer periods as the investment is spread out. These funds are suitable for those investors who are looking for a more aggressive alternative to pure debt funds and want to invest in equity for higher return potential, while limiting their losses in case the markets fall.
Invest in dividend-paying stocks
Retail investors should ideally invest in high dividend paying stocks because even if the price of the underlying shares fall, they can still earn steady dividend income which will be beneficial in the long run. In fact, rising dividend pay-out ratio over a longer period is an indicator that the fundamentals of the company are strong. Alternatively, equity mutual fund investors should look at dividend yield schemes for higher tax-efficient returns as they invest in stocks of dividend yielding companies with a preference for firms that have a consistent track record of paying dividends at the time of investment.
IPOs & NFOs: Tread with caution
Companies have raised over Rs 1 lakh crore through IPOs this year till date and many more are in the pipeline. Typically, large and overpriced IPOs come towards the end of the bull market and investors need to be cautious now.
In fact, the cautiousness was seen in the unenthusiastic response towards the IPO of Paytm, the country’s largest primary offering to date. Mutual fund investors should be cautious of NFOs as fund houses float most of them during a surging market and capitalise on the optimism. Experts say it is better to invest in an ongoing fund instead of NFO unless it offers a unique opportunity to invest that does not exist in the current products.
Accumulate quality stocks
Investors must identify value stocks which are out-of-favour now. As they are considered to be undervalued based on certain basic metrics such as a lower P/E ratio than their industry average, they can be promising stocks in the long-run. Ajit Mishra, VP, Research, Religare Broking, says that while traders should continue with the bearish bias and use the bounce to create shorts, investors, on the other hand, should see this as an opportunity and start accumulating quality stocks in a staggered manner.