The market indices is seeing wavy pattern which is highlighted in the below table:
The absolute variance of NIFTY during August, September & October* this year has been 6%, 6.5% and 7.7% respectively.
*up to October 29th
The PE multiple of NSE 500 is 41.71 times. The unprecedentedly high Price-Earnings multiple is exceptional and more of a reflection of nationwide lock-down during first quarter of CFY (current financial year). The yardstick of PE measure should ideally be linked to 1-year future estimated earnings instead of TTM (trailing twelve months period). Even from futuristic profits point of view the current market rates are high and comparable to previous peak periods.
Participation in equity market has increased during pandemic which has helped keep-up the buoyancy.There is also a consensus among economists that India shall play an important role, after China & USA, in world growth contribution by 2025.
With this background, how should one invest?
Markets are at optimum levels if not over valued. Hence scope of sizable growth in near-future seems remote. On flip side, any not-so-nice news can result in market fall.
Most investors are seeing their investment corpus value moving in wavy pattern during last few months and not profiting in real terms.
While in the long run investors would benefit but for the short-run (six months or so) the strategy should be different. In our previous blogs, we had mentioned of extremely short-term profit booking strategies, which works well considering absolute monthly variance of 6% plus.
We recommend strategies where on opportunity investor completely divests his entire (100%) equity investments and invests back (up to 100%) at attractive bargains. With this approach investor is not only better equipped to book profits in wavy market but also will stand more protected as he may not be fully invested during falls.
The crux lies in dynamically swiveling your corpus between 0% to 100% investments. In our experience every month gives at least one opportunity of churning your corpus with profit opportunity of 3% and more.
With investments in mutual funds and monthly SIP's you cannot follow this approach as more than 80% of your corpus will continue to remain invested at all times, irrespective of whether the indices are up or down.
Investors can have their own preferences, like the ones listed below, in following this strategy:
Selection of scrips for possible investments (choice of stocks, basis for buying target price and selling target price). It is advised that the list should be reviewed every fortnight (if not earlier) and scrips and their respective entry / exit rates should be chosen basis stock beta, PEG (Price-Earnings Growth ratio), market / anticipated news, trading volumes, track records, etc).
Investment allocation - Broad guidelines on maximum number of scrips, minimum and maximum investments [different limits can be set for different scrips], etc
Indices reference - guidelines of major & complete sell offs when indices crosses our respective estimated targets
This approach of up to 100% divestment can also work well for existing long-term investors who can sell and buy the same stocks taking advantage of price movements.
It's time to rattle your mind over this radically different approach wherein at times you may hold zero investments and at other times you may hold investments anywhere in range of 1% to 100% of your corpus value. Remember, your investments in mutual funds predominantly stays invested.
This strategy is relevant when markets are fully priced and enough reasons for near-term leap doesn't exist. Try it out with caution, prudence and discipline as associated risks are very high in equity investments.
Here is the partial list of stocks in which our clients had booked profits in the last one month - Aurobindo Pharma, Balaji Amines, Britannia, Cadila, Federal bank, HDFC bank, HDFC, HUL, Indusind Bank, NTPC & Bharti Infratel.