Rishabh Parakh is a Chartered Accountant by Profession and a founder and Chief Gardener of Money Plant Consultancy, an established firm based out of Maharashtra with operations expanded to Singapore & the UK. He is also an author of the Book titled "Financial Spirituality".
Even as India’s GDP rate has fallen to a six-year low of 4.5 percent, the Sensex continues to remain bullish, charting record heights with an all-time high of 41809 very recently. Quite unusual, no? Because the markets usually go high in a thriving economy.
Many investors find it even more unusual since the growth in Sensex and Nifty is not reflecting in their portfolio. How does one explain dipping GDP, rising markets and low portfolio returns? More importantly, how can one use this as an opportunity to make more through their investments in the mutual funds?
Let’s first understand what is happening
First of all, the most important thing to note is that both Sensex or Nifty represent the largest and the strongest companies as listed on the respective stock exchanges and are an average of the *only* the top 30 and 50 companies’ stocks respectively. Not all.
Now, the BSE Sensex has gone up by around 14 percent in 2019. But around the same time, returns in the BSE mid-cap and small-cap companies have dropped by about -4 percent and -8 percent respectively. So, while we keep hearing about markets going up, what we don’t look at is how most of the small and mid-cap stocks are not part of this rally at all. You should also know that not all stocks that are part of the Sensex growth. The rally is driven by a handful of stocks and thus, most stocks were not a part of the soaring markets.
Now let’s understand why it is happening
Since we now understand how Sensex goes up, let’s see why it goes up. The stock market runs more what will happen in the next few quarters and not so much on what has happened already. The market believes that the situation will improve in the medium term, and there will be improvement in the corporate earnings and growth. Thus, investment continues to grow in the strongest companies that are considered safe and you see the rally in the relevant large cap stocks.
Time to press the panic button?
The constant talk of a slowdown, higher valuations, weak corporate earnings and concentrated market rally have challenged the investor community in terms of deciding on with their investment strategies. But, quite often, an investor forgets that his/her portfolio was built on the basis of his/her financial goals, timeline and the overall risk profile which is immune to the economy’s performance in the short-term.
As a thumb rule, you do not need to disrupt a well laid out financial plan based on a market disorder.
Wait, pause and reassess
The present time calls for a reassessment of your existing portfolio and warrants an action basis your risk profile and overall asset allocation. The market will eventually go up, but you cannot predict when. The best strategy is to wait and watch. Simultaneously reassess your portfolio and invest your money accordingly.
Who dares, wins
Remember that a scared investor will look for protection whereas a brave investor will look for opportunities. You can really make money, if you play your cards well.
Following strategies could benefit you depending on your profile.
For a risk-averse investor/conservative investor:
For a moderate risk taker:
For an aggressive investor:
There is a slowdown, but not a recession. As shown above, you can still make money. Just remember, there is no one-size-fits-all solution in the markets. Choose yours, depending on your own goals.
The author is a Chartered Accountant by Profession and a founder and Chief Gardener of Money Plant Consultancy.