Explained: In equity wave, don’t forget the basics

While investors have been benefiting, the high levels of the market and the expensive valuations definitely call for a cautious approach.

On a day when the benchmark Sensex and Nifty closed at fresh highs (above 59,000 and above 17,600 respectively), Ajay Tyagi, chairman, Securities and Exchange Board of India (SEBI) cautioned investors against market risks and called for due diligence before investing.

“It is extremely important for the investors in securities market to be consciously aware of the fact that such investments are subject to market risks. Before making any investment decision, they need to do their due diligence and not be carried away by unsolicited advice which may not be reliable,” Tyagi said at the Financial Markets Summit of CII.

The rise has seen a big surge in retail participation in equity markets. In 2019-20, on an average, 4 lakh new demat accounts were opened every month, which has risen to an average 26 lakh per month in the current financial year. Even individuals’ average share in the daily cash market turnover has jumped from 39% in 2019-20 to around 45% in 2020-21 and 2021-22. Holdings of individuals in listed companies have increased from 8.3% at the end of Q1 2019-20 to 9.3% at the end of Q1 2021-22.

While investors have been benefiting, the high levels of the market and the expensive valuations definitely call for a cautious approach. Investors should not only go for fundamentally strong and better run companies, but should also follow the basics of investment at all times, which include: asset allocation (mix of debt, equity, gold and other assets), due diligence before investing in the primary and secondary markets, avoiding leveraged investment and going for professional advice. Most importantly, as the SEBI chairman said, investors should not be carried away by unsolicited advice which may not be reliable.

Maintain asset allocation

At such a time, it is possible that investors may get tempted to divert funds from other assets (fixed deposits, debt MFs, provident fund, gold etc) into equities. It is important to keep in mind that different asset classes perform at different times and a mix provides a balance to the portfolio and helps the investors absorb the shock of an adverse equity market movement. Even within equities, investors must not pull out money from mutual funds to invest in direct equities for higher return. It is better to let a professional fund manager take the call on investments in the stock market. Experts say it is also important to have a sizeable amount of cash flow in an asset class that preserves the capital.

Surya Bhatia, founder, Asset Managers, said, “Considering that the pandemic is not over, individuals must keep at least three years of cash flow in safe asset class. Also, given the market rally, it is important to move the funds from mid- and small-caps to large-caps.”

Due diligence

Whether it is investing in IPOs or listed stocks, investors must do a basic check on the company, besides ignoring unsolicited investment tips through messages on the phone. A basic check will show if the company is fundamentally sound and has a stable business. Some basic details include: business of the company, revenue and profit of the last three years and growth of these; debt in the books of the company; and investment by FPI or domestic institutions in the company.


Avoid leveraged investment

In times of low interest rates and a bullish stock market, it is very natural for investors to think about borrowing at low rates and investing in the equity market for high returns. Retail investors should never fall for such an idea. There are enough risks in the market and if it were to fall after the borrowed investment, it could be a messy situation. While the pandemic risk is not over yet, there could be volatility in the market once central banks announce the withdrawal of liquidity infusion and decide to increase interest rates. Besides, valuations are in the expensive zone.

“The related issue is as to how excess liquidity in the system would be managed by the central banks including the timing and pace of unwinding. The level of inflation is another factor to watch. Given the uncertainty, it is difficult to predict the inflection point,” said Tyagi.

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