Real test for investor is in navigating volatile times

By Nimesh Shah
Times of India
July 26, 2017
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The liquidity driven rally is mainly being fuelled by the increased participation of retail investors via SIP route

Nifty 50 today briefly crossed the 10K mark for the first time in the index history, aptly reflecting the conviction of the strength in the Indian economy. From a global context, India stands out for its stable macros and gradual but steady pace of reforms. Even though this calls for jubilation, it would be mindful to check the reasoning of the exuberance seen in the market. The two main drivers of the current rally underway, without doubt, can be attributed to liquidity and the expected rise in India Inc's corporate earnings.

The liquidity driven rally is mainly being fuelled by the increased participation of retail investors in capital market via the SIP route. As of June 2017, the monthly SIP book for the mutual fund industry stands around an impressive Rs 4,600 crore. On a year-to-date basis, data suggests that both domestic and foreign investors have invested around Rs 50,000 crore each into the Indian market, thereby lifting the market to new highs.

The second reasoning is the expected uptick in corporate earnings. Currently, capacity utilization for India Inc is at historically low levels. As demand increases, the corporates can manufacture more without spending additionally to build capacity. This can result in higher operating leverage. We believe all the catalysts required for the recovery process in corporate earnings are in order — falling cost of capital, higher market share of organized players as a result of GST implementation, improving operating leverage to name a few. Once all these factors fall in place, an uptick in earnings per share, can play out. This is another factor which is likely to feed into the current rally and take the markets higher from current levels.

Amid this environment, it would be helpful to look at what historical trends suggest. It can be noticed that in any liquidity driven rally, inflows keep coming in as long as the market is edging higher. Thereafter, when this liquidity starts ebbing, markets tend to turn volatile. So, the real test for the investor is in navigating the volatile times and controlling one's greed and fear in the current market cycle. Often when the market rallies, investors tend to second guess — Is it time to book profits? Ironically, there is never a clear answer to this question.

This is where financial products such as mutual funds which are dynamically managed between multiple asset classes come in. Through its very construct, balanced advantage category of funds are designed to invest in equity and debt based on the relative attractiveness of each of these asset classes. Some of these funds are even be model based, which operate in a manner that when markets are expensive, they reduce equity exposure and vice versa. This ensures that buy low, sell high as a philosophy is practised. What this mechanism tries to ensure is that when the market turns volatile, the downside is largely cushioned owing to the dynamic allocation of the fund.

We believe, this is one category of fund wherein an investor can allocate lump-sum or invest via Systematic Investment Plan (SIP) at any point in time in a market cycle. This type of fund can work well for investors, who are conscious of market volatility. For such an investor, investment into one of such funds gives an opportunity to enjoy better risk adjusted returns and tax efficiency at low volatility. In fact, such funds can be used as a stepping stone into the world of mutual funds. With Nifty at all-time high, it's time to be prudent with one's investment.

This article was published on July 26, 2017 in Times of India