Sensex inching towards 40,000: 5 key investment questions to ask and how to deal with them

The BSE Sensex is eyeing the 40,000 mark. It touched a lifetime high of 38,989.65 recently and have given over 22 percent return year-to-day. Investors who have been locked into the right stocks could be seeing their portfolio giving good returns.

However, the rising indices also give jitters to investors who fear of correction and a consequent erosion in portfolio returns.

Here are some common questions that would cross every investors’ mind in these circumstances and what investment advisors say about them.

Should I exit equities at this point and stay in cash?

Personal finance experts say it is not a good strategy to eye market valuations and try to time entry and exit strategies. Trying to time the market could lead to lost opportunities.

“It is not advisable to stay in cash and wait for a correction. Historically, no one has been able to time a market top or a bottom. The key therefore is to stay invested in quality names for a long term, if there are handsome gains in one’s portfolio than it is advisable to book profits and get exposure in the names that have yet not participated in the rally, there are plenty of stocks even in the benchmark indices that have not yet participated and are presenting interesting value propositions and could be good long term buys,” says Rajeev Agarwal CEO Wealth Discovery/EZ Wealth.

Should I take advantage of the momentum and invest fresh money?

Advisors say one should not chase returns and have a definite long term investment plan with proper asset allocation. “Chasing market returns is a tricky game. Even though the Indian equity markets are making all-time highs every other day, it is important to note that the current equity rally is being fuelled by only a select few stocks. Also, this is one of the most concentrated performances that the market has ever seen.” Says Anil Rego, Founder and CEO, Right Horizons.

Do I continue or stop my SIPs?

Again, personal finance experts feel investors should not decide their strategy on the basis of market movement. “We strongly recommend you to accumulate more units through the SIP route. The market may be volatile due to various local and global events. SIPs can be continued if the time to goal is long period. If the time to goal is less than 3 years, it is better to stay away from equity and start the sip portfolio in debt mutual funds to avoid a risk,” says S Sridharan, Business Head, Financial Planning, Wealth ladder Investments, agrees.

Rajeev Agarwal the SIP strategy should be aligned to ones goals and not to market fluctuations. “The basic principle for equity investments through Systematic Investment Plans (SIP) is to achieve rupee cost averaging. The successful investment strategy when it comes to SIP investment is to choose a plan that agrees with one’s financial goals in the long term such as buying a house, child education, marriages and to not focus on short-term market volatility. It is again imperative to emphasize that it is near impossible to time a market peak or a bottom; therefore investors should never make decisions to exit or pause an SIP during market volatilities because in doing that the investor would lose an opportunity to average down cost and would book losses, which would never be recouped,” he said.

Should I sell equities and rebalance towards debt?

With the run-up in equities, one can think of rebalancing the portfolio towards debt. Rego says investments should always be a function of asset allocation. For instance, if you have decided to invest 50% in stocks, 30% in fixed income, 15% in cash and 5% in gold, it is always a good time to look at the current state of asset allocation after any big & consistent jump in one asset class. “Sticking to the pre-decided asset allocation should be your primary aim, rather than chasing market returns. If your asset allocation pattern shows that you should invest more in equities to get the balance right, let's invest more,” Rego said.

Sreedharan agrees.  “This could be a good time to rebalance the asset allocation as the equity market has run up quite a bit. Assuming, the investor maintains an asset allocation of 70% in equity and 30% in debt. The equity allocation could have topped due to the recent run up in the equity market and the present allocation could be 80% in equity and 20% in debt. It is advisable to book profit from the runner and move it into debt to ensure that the portfolio is well balanced.

Which fixed income instruments should I look at?

Advisors feel that the choice could be between bank FDs and debt mutual funds.The highest bank FDs today are offering 9% interest rate but that is only for some new banks. For most banks, the rates are between 6.5-7.5%. “If your asset allocation pattern has more room to add fixed income, do invest in bank FDs. However, do also remember that bank FDs are not as tax efficient as debt mutual funds even though return and risk profile is very much similar for both the options. Also, the purpose of the fixed income part of your portfolio is to provide stability. But that stability can often come at the cost of poor inflation-adjusted returns,” says Rego.