Indian equities are in an exciting phase, with the benchmark indices around historic highs. This has been on account of a combination of strong domestic and global cues. Even individual investors took notice and got into the equity market primarily through the Systematic Investment Plan route, a welcome change.
Even so, this is a time for individuals to invest cautiously; the markets are no longer cheap. On most of the measurable parameters, the market is either fairly valued or quoting above fair value. Indicating the risk-reward ratio is not as favourable for investors as a few months before.
This means the safer part of market return is almost over. To put in perspective, there are three distinct investment phases -- early, mid and end cycle. During the early cycle, one can expect high return but this phase seems behind us. We are in a mid-phase, generally a boom one but not in bubble territory. This presents opportunities for an investor to make reasonable but not mega returns.
However, the here is that macro economic conditions remain stable and corporate earnings might improve. While India Inc witnessed largely flat earnings growth for three years (FY14-FY17), we expect a meaningful pick-up here by at least 20-25 per cent, across sectors. Further, the first sign of impact from the new goods and services tax can be gauged in FY19.
Amid all these positive factors, it is possible for investors to lose sight of market realities. In the past five years, there have been no major corrections which could have served as a reminder of a sell-off. Historically, it has been observed that as markets tend to revert to the mean, and with the safer part of returns already behind us, it’s time to take a look at the type of mutual funds one is allocating money to. And, more important, checking if asset allocation is balanced, in line with one’s risk profile. For, over the long term, a proper asset allocation strategy is the fulcrum for wealth creation.
For an individual, investing at historically high levels should be all about being prudent. With the recent rally, we feel investors could increasingly deploy fresh cash (lump sums) to dynamic asset allocation funds. By investing in these, an investor has the opportunity to take exposure to both debt and equity; the investments will be based on the attractiveness of that particular asset class. This might render a better investment experience when the markets turn volatile at higher levels.
In sum, it is worthwhile to remember the basic tenants of investing. In a boom, invest cautiously; in a bubble, aim to reduce risk by profit booking; in a bust, invest aggressively. Currently, we are in a boom and it is time to consider investing defensively, through dynamic asset allocation funds.
The author is executive director and chief investment officer, ICICI Prudential AMC