Nifty at Record Highs: What should investors do?

What should investors do Nifty at Record Highs: What should investors do?

In the last 3 weeks, the Nifty has had a frenetic rally. After touching a low of 11,600 it not only breached the psychological level of 12,000 decisively but also got within a stone’s throw of 13,000. But, what exactly spurred the Nifty so aggressively in such a short span of time?

There were a number of factors at play

If you were to look at it dispassionately, there were at least five key factors at play.

  1. The election of Joe Biden as the next president gave hope to the markets that the prolonged frigidity in US-China relations would improve and trade would pick up.
  2. The Q2 results in India were much better than expected. Although sales were still down on a yoy basis, cost control ensured that operating profits and net profits were higher.
  3. FPIs are buying like there is no tomorrow. In the first 12 trading sessions of November, FPIs infused Rs.40,000 crore, more than the previous seven months in total.
  4. Despite risks of the second coming of the pandemic, Indian recoveries were improving and the world looked closer to a vaccine.
  5. Above all, the decision of the MSCI to increase India’s weight in the index, promised fresh ETF flows to the tune of $3 billion, propping up the markets.

That brings us to the million dollar question. With the Nifty near 13,000 and Sensex near 44,000, how should investors approach this market?

Six rules for investors to follow at lofty highs

It is easy to say that you must focus on stocks and not look at the index. But, investors are investing with real money and at play are real emotions. Hence the strategy should also be real and applicable at a practical level. Here are six ideas when Nifty is at a peak.

  • Idea 1: Focus on stocks that have a story in the next one year. Stop worrying about investing for five years. Nobody has a clue about that. We are just coming out of a massive COVID pandemic. Some sectors are clear beneficiaries. Pharma sector has to find the cure and deliver it to the people. IT has to enable companies to function more efficiently in the post-COVID world. It is very difficult as an investor to be wrong on these companies.
  • Idea 2: Look out for the growth bouncers. Imagine, you are a metal stock or a capital goods stock that has been beaten out of shape. Things cannot obviously get worse from current levels and as the world spends to recover, they also need to invest. Everything from metals to capital goods , cement and electrical goods will be in demand. In short, any sector that is going to drive India GDP from -10% to +10% is a good candidate.
  • Idea 3: Look for the quality stocks that fell in sympathy with the market as a whole and have rebounded. These are the stocks with inherent strength. Remember, when the economy is recovering from an unprecedented low, it is only the sectoral leaders and niche players that will gain. You can locate them by focusing on the stocks that have bounced back to pre-COVID levels or better.
  • Idea 4: Think like an investor but act like a trader. If that sounds esoteric, it is actually simple. Don’t take your targets seriously. In this market, it is always to keep churning your portfolio. If your target return was 40% in 1 year and you earned 20% in 1 month, then it is too good to be true. The principal is that if something is too good to be true then it is probably not true.
  • Idea 5: Think beyond equities and spread your risk. When the Sensex is at 44,000, all that you need to do is to chase away risk and not chase returns. If you can spread your risk by distributing your capital across more assets, then you will automatically earn higher returns. This includes gold and international equity assets too. Click here to start your international journey.
  • Idea 6: Finally, we come to a very mundane topic; don’t forget your asset allocation. You started off with a certain asset allocation. It is time to sit with your advisor and evaluate if you need to change the mix or change your portfolio with the market conditions. The advantage of an asset allocation approach is that value buying and profit booking becomes an automatic process.

The moral of the story is that a clear cut asset allocation approach would work best at these dizzy heights of the market. That is your best bet against any kind of volatility.

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