Sensex hits 66,000: What should be your strategy with equity mutual funds?

Sensex hit an all-time high of 63,588.31 on June 21 on the back of continued buying of local equities by FIIs and improved macroeconomic factors

Sensex, the bellwether index, has crossed 66,000 mark. Nifty 50 is trading above 19,500 mark. So, it is natural for some investors to get jittery. And now that the Nifty50 are heading towards 20,000 mark, investors are cautious. Investment advisors, however, are batting for asset allocation instead of deciding a course of action based on short-term returns.

So, what has changed this time compared to the previous highs?

Most investors worry that they are paying too much for stocks when indices are nearing new highs. The Nifty 50 index made a high of 18,887 on December 1, 2022, when it was valued at a price to earnings (P/E) ratio of 22.61. At 19,384 on July 12, 2023, the P/E ratio stood at 22.58. Four years ago, on June 17, 2019, it commanded a P/E of 28.87. Put simply, the valuations have come down. They are not attractive to investors but are also not too expensive.

ALSO READ: Income-tax shocker: Data on advance tax payments missing in prefilled return forms

"Rising manufacturing PMI, a sustained increase in public capital expenditure, and increasing credit demand from banks with strong balance sheets indicate that our economy is in a better position than it was at the time of the previous high. Relatively lower valuations further make us comfortable," says Nirav Karkera, Head-Research, Fisdom, a mutual fund distribution platform.

Despite increased interest rates over the last year, there has been little moderation in expectations of economic growth. That should reduce the stress for investors eager to commit money for the long term.

ALSO READ: Not just Motilal Oswal’s new microcap index fund, active MFs, PMSes & AIFs too fish for tomorrow’s multibaggers

Arun Kumar, Head-Research, FundsIndia.com, says, "Irrespective of market levels, if these three conditions occur together, i.e., very expensive valuations, the late phase of the earnings cycle, and euphoric sentiments in the market cycle, then you should worry about a possible bubble in the markets and re-evaluate your equity exposure." We don't see any major bubble signs in the markets now as the markets are not too expensive, we are in the early stage of the earnings growth cycle, and investor sentiment is not euphoric, he adds.

ALSO READ: ITR filing: How to file income from capital gains or set off capital losses

Will markets rise further?

Predicting the future can be tough. Though we have come out of the COVID-19 pandemic relatively less impacted compared to other countries, the risks cannot be ignored. A further increase in interest rates by the US Federal Reserve can impact sentiment negatively. If other central banks, including the Reserve Bank of India (RBI), follow it with rate hikes, then it can spook sentiment. Foreign institutional investors (FIIs) still play a significant role in the Indian market. In May 2023 FII emerged net buyers with an inflow of Rs 27,856 crore.

ALSO READ: Will BlackRock’s spot Bitcoin ETF breathe life into the comatose crypto market?

Though they have emerged buyers for three months in a row, it will be interesting to see if they continue to invest in Indian stocks. If they keep pumping money at a time when domestic flows are stable, the markets may see new highs soon. But if they decide to pull more money out of India, then we may see some volatility. Crude oil and other commodity prices have been soft for some time now, offering some hope on the inflation front. But will they remain so in the near future? That is anybody’s guess. Lok Sabha elections are slated for early 2024, and the markets may go through some volatility well in advance.

Put simply, there are too many factors that can influence stock prices.

Kumar says, "Investors are better off being guided by their original asset allocation for their existing portfolios at this time. Waiting for a correction to play out may prove costly, as it gets difficult to get back in if the market momentum continues."

What should you do?

You cannot control how the markets react to news flows. However, you have control over your asset allocation and how you invest. It is better to ignore the noise and the short-term movements in the stock market. If your portfolio’s current asset allocation has seen a large deviation from the original asset allocation, then this can be a good time to rebalance. It may ensure peace of mind for you. If you are building your portfolio, then you should base your actions on your asset allocation.

"Do not sell your equity mutual funds just because the markets are nearing all-time high levels. Consider booking profits if and only if you have some near-term financial goals, such as paying for a high-ticket purchase that is yet to be funded," says Vinayak Kulkarni, a Mumbai-based mutual fund distributor.

Karkera believes that large-cap stocks offer better risk-reward payoffs compared to small- and mid-cap stocks. "Investors should allocate more to large-cap or flexi-cap funds at this time. If you are keen on small- and mid-cap funds, then go for actively managed funds over index funds, as we may see stock-specific or sector-specific movements going forward. Also, small- and mid-cap stocks may get more adversely affected due to external events such as rising interest rates, compared to their larger counterparts," he says.

ALSO READ: As Kotak Mahindra Bank launches its ActivMoney auto sweep account, here’s all you need to know about this feature

Given the slightly higher valuations, for new money intended to be invested in equities, Kumar recommends investing 30 percent now and the rest through systematic transfer plans (STPs) over the next six months.

Kulkarni advocates allocating at least 5 to 10 percent of your portfolio to gold from a diversification point of view. He recommends investing in equity funds as well as gold exchange-traded funds (ETFs) in a staggered manner. "Do not get worried about volatility. Continuing with SIP in equity mutual funds and adding more money to it in volatile markets can help you use volatility to your advantage and build a large corpus," he adds.