Photo: HT
Photo: HT

Don’t get greedy when equity markets rise

Investors tend to match their asset allocation to volatility in markets, but financial advisers and distributors advise against it and suggest sticking to goal-based plans

The sharp and consistent rise in equity markets has been evoking strong reactions from many investors, say financial advisers and distributors. On 9 September, the S&P BSE Sensex ended at 28,797.25, yielding returns of 10.26% so far this year.

Nine out of the 12 sectoral indices have yielded positive results so far this calendar year.

The recent performance of equity mutual funds also inspires confidence.

While large-cap funds have risen about 15% in the last 1 year, mid- and small-cap funds have gone up by almost 20% on an average. In the past 3 years, mid- and small-cap funds have returned an average of nearly 40%.

Investors are moving between hope, fear and greed and many are asking: “Should I put more money in equities?"

It’s easy to be swayed by heated markets. But financial advisers are telling investors to stick to their asset allocation, irrespective of where the markets seem to be headed.

Deepak Chhabria, founder and chief executive officer, Axiom Financial Services Pvt. Ltd, a Bengaluru-based financial services distribution firm, says that those who have been investing for many years understand market volatility better than others.

“But there are those investors who missed the bus and have been sitting on the sidelines for long. These investors grow impatient. We use data to temper their excitement," he says.

One data that Chhabria often uses these days is to show the difference in how the mid-cap scrips have run up compared to the large-cap scrips.

The price-earnings ratio (P-E) (which is an indicator of how much that market is willing to pay for every rupee of earnings) of BSE Mid Cap index has risen to a high of about 22 times, from 16.57 times in June 2015.

The S&P BSE Sensex’s P-E has gone up to 18 times, up from about 15.5 times in the same period. Still, says Chhabria, if the fence sitters insist on investing more in equities even at these levels, he suggests putting away a small sum by way of a lump sum investment, and the rest as a systematic transfer plan (STP).

An STP works just like a systematic investment plan (SIP), except that you put a lump sum in a liquid fund and then keep transferring a fixed sum into an equity fund. To do this, both your liquid and equity funds must be from the same fund house.

Most of the financial planners and distributors acknowledge the presence of experienced investors in their ecosystem.

As per the Association of Mutual Funds of India (Amfi) data till June 2016, almost 40% of equity investors stayed invested for more than 2 years.

Poornima Katpadi, founder and investment specialist at Simplesolution4u, a Mangalore-based distributor, says that she prefers to focus on financial planning rather than market movements. “First we make the goals, then determine…how much we need to put away regularly to reach there. Then comes asset allocation," Katpadi says.

She adds that communication with her clients (the investors) is important: “We don’t talk to our investors by talking price:earnings or return on equity. We educate them on the fundamentals of investing."

Many financial planners keep one eye on the markets and make use of opportunities, while keeping the other eye firmly on asset allocation.

Anup Bansal, co-founder and managing director, Mitraz Financial Services, says that he has advised his investors to exit index funds and exchange-traded funds that track the broad market indices like Sensex and Nifty.

“When markets get overheated, we trim our exposures to broad markets, but we take specific calls like selective mid-cap and small-cap stocks that are more driven by their underlying earnings potential and not the broad market trends," he says. And he quickly adds: “Market volatility will always be there. Investors have to stay put with asset allocation."

Srikanth Bhagavat, managing director, Hexagon Capital Advisors Pvt. Ltd, which runs Hexagon Wealth, says that he has advised a small trim of his clients’ equity exposures on account of “asset prices (being) overpriced globally".

Shyam Sunder, managing director, PeakAlpha Investment Services Pvt. Ltd, has a slightly different take.

“Apart from interim volatility, markets should (always) be growing because sales of companies should grow and they should make profits…. But words like ‘all-time highs’ and ‘bloodbaths’ tend to drive human behaviour," he says.

He then says that investors should desist from the two normal reactions they have from market movements: greed and fear.

Stick to your asset allocation and don’t increase your equity allocation just because the markets are at a high.

But, if you are nearing your financial goal thanks to the surge in markets, shift some of your gains to safer avenues like a debt fund or a fixed deposit.