Every rupee invested at current levels could yield a favourable risk-reward for long-term investors.
After a sharp fall in markets, all key valuation metrics such as P/E, P/B, and Market Cap/GDP indicate that equities are firmly in the attractive zone. We have also witnessed that policymakers across the globe are increasingly stepping up to the challenge, with several large-scale support packages announced to counter the economic shock caused by the spread of COVID-19 pandemic. The steep rate cut has been announced by the major banks at one end and on the other side, global fiscal stimulus totals $7 trillion with more in the offing. Given the scale of the stimulus package, fearful sentiments, and attractive valuations, we believe every rupee invested at current levels could yield a favourable risk-reward for the long-term investors.
Let us understand the investment strategy one can follow in these times –
1. Start investing through Systematic Transfer Plans (STP): For those who have investible cash, it may be prudent to increase the allocation to equity. It is, however, apt to spread your investments over the next few months or so. In current market conditions, investors can look at large-cap or multi-cap funds as in a challenging environment, sector leaders with relatively stronger balance sheets, higher earnings visibility, strong cash flows and management with a good track record tend to do well. The current fall was led by intense selling pressure from FIIs, Quant Funds, and ETFs which primarily invest in large-cap stocks. So we feel that once things get stabilized or some vaccine is invented, it is the large caps, particularly the growth-oriented quality stocks that will rebound first.
2. Top up your SIPs: Investors with ongoing Systematic Investment Plans(SIPs) should continue with the current SIPs if they can’t increase the amounts. The ongoing correction is a good opportunity for rupee-cost averaging, which is one of the tenets of SIP
3. Review your asset allocation: It is a good time to revisit the portfolio’s asset allocation. Such market condition provides a good entry point for the investors sitting on the fences. For an equity-oriented investor, it is time to shift money to equity, albeit in a staggered manner.
1. Avoid panic redemption: Panic selling in the current environment can cause considerable harm to long term portfolio returns. Investors could end up selling at throwaway prices what was accumulated through a long accumulation journey.
2. Don’t stop SIPs: It’s not a time to stop the SIPs as it will defeat its purpose of rupee cost averaging. It’s a perfect time to increase the SIPs for existing investors and start the SIPs for the new investors. Empirical data lend credence to the fact that one who invested at this valuation level in the past has generated enormous wealth over the long term (5-7 years).
3. Don’t violate your asset allocation: Your asset allocation reflects your risk-taking ability as an investor. Investors should invest keeping in mind their medium-term needs for cash, regular income needs, and other assets in the portfolio.
4. Do not buy in bulk quickly: Many investors could tend to jump in too quickly. There is no way to call an exact bottom, nor can we tell how far it is. A suitable approach is to spread investments in small parcels over the next few months or quarters.
(By Bajaj Capital Research)