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Sensex @ 13K - How to play the markets?

Published on Mon, Oct 30, 2006 at 12:48 | Source : Moneycontrol.com

Updated at Fri, Nov 10, 2006 at 18:57

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At a time like this one is reminded of the old story where Birbal kept the weight of a goat constant by giving it as unlimited fodder and then caging a wolf next to it, so that it never ate more than it needed. The investor is equally strongly driven today by the fear of investing in an over-heated market and the desire to participate in the general prosperity.

Let us begin with one salient fact - investing cannot be ignored nor can it be postponed. Your choice of assets is limited - gold, bank deposits; government sponsored or promoted savings schemes, the debt market and the equity market. I will be writing this article with a limited focus on what you should be doing in the equity market in these times.

Time horizon: This is an extreme market. A huge amount of liquidity is chasing stocks, because India is happening - let no one tell you that the rationale institutional investors are not swayed by sentiment. Like any sentiment there is a sound basis in fact: India is set to realize its economic potential, but it won't happen overnight. (Also read - Learn to invest in equities with 'no capital risk')

So the first tip is that you can invest with one of two horizons: either 3-5 years or day trading. By committing to a 3-5 year horizon, you must be prepared to weather short-term corrections (by which I mean even sustained negative phases lasting months with everyone talking about how it would be wise to stay away from the market).

If you don't have the ability to commit money of this nature, the alternative is to develop a good broker as a friend and seek his help in trading on stocks on a daily basis for a profit (after brokerage and STT) of between 15 paise to 25 paise and a stop loss of say 10 paise. Don't worry, this is not gambling; it provides legitimate liquidity to the market. But it is risky, since most of your dealings will be in little known stocks with often little or no fundamental merit, and very low volumes. You can get stuck in your position. (Read more - 10 myths about Systematic Investment Plans)

My suggestions would be to try the former unless you are in a job, which gives you ample free time, or are retired and have adequate time to monitor your broker's activity.

Directly or through a mutual fund: Again the argument in favour of mutual fund investing is that you may not have the time to do some serious investment analysis. But even in investing in mutual funds, you need to play to a strategy. The best way to do this is:

If you have a lump sum, place it in a liquid or floater fund, and leave instructions with the fund to transfer it systematically into the equity fund of your choice.
If you are investing a small amount each month, use the SIP route, invest a little bit each month in 3 or 4 funds
Do look at index funds for at least half your money, even for SIP. Fund managers are human, and they can be tempted by better job offers and promotions. An index fund does not face the problem of change of hands. Index funds are also cheaper
A very aggressive fund choices like mid-cap or sector funds unless you have some special knowledge of a sector.

Fear or greed - how to beat both: Don't forget debt funds. They are still good for your bread and butter investing. The interest rates have stabilized and the returns are tending towards the normal. Keep your main savings and profits from equity investing in debt funds. Suddenly MIPs are also looking like an attractive option once again. Unfortunately the brief period of uncertainty for these funds last year has given them a bad name, but these are ideal options for the safety seeking investor, who wants limited exposure to equity. Look at taking an SIP in an MIP; this may be your best bet if you are a conservative investor. (Read more - Be cautious while investing in MFs)

Conclusion: Actually, if you get down to basics the norms of good investing remain true - but markets like this require that we be reminded of these strategies once again. The only difference between investing in a hot market and one that is just getting hot is that the risk-reward ratio for the mid-term time horizon (3 to 6 month) becomes so bad that it is best to stay away. When the index was at 5000, you may have probably profited from the stag approach; but no longer.

- Krishnamurthy Vijayan

The author is an investment expert.

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