Risk-reward unfavourable, don't expect mega returns

Amid all these positive factors, it is possible for investors to lose sight of market realities

Indian equities are in an exciting phase with the benchmark indices hovering round historic highs. The surge has been on account of a combination of strong domestic as well as global cues. Even the retail investors took notice of the improving fundamentals of the economy and invested into equity market primarily through the SIP route, which is a welcome change. Nevertheless, we believe this is the time for retail investors to invest cautiously. This is primarily because markets are no longer cheap. 

On most of the measurable market parameters, the market is either fairly valued or is quoting tad above fair value. To put it in perspective, there are three distinct investment phases - early, mid and end cycle. During the early cycle one can expect high returns, but this phase seems to be behind us. Currently, we are in a mid-phase, which is generally a boom phase but not in bubble territory. This phase presents with opportunities for an investor to make reasonable returns. 

However, the assumption made here is 1) macroeconomic conditions may remain stable and 2) corporate earnings may improve. While India Inc. witnessed largely flat earnings for the past three fiscals (FY14-FY17), we expect a meaningful pick-up in earnings by at least 20-25%, across sectors. Further, the first signs of GST impact can be gauged in FY19.

Amidst all these positive factors, it is much possible for investors to lose sight of the market realities. Hence in such a situation, it’s time to take a look at the kind of mutual funds one is allocating money to and more importantly checking if asset allocation is balanced as per one’s risk profile. Reason being, over long term proper asset allocation strategy is the fulcrum for wealth creation. 

For a retail investor, there are two ways to navigate when it comes to investing at historic high levels. 1) Be prudent. Revisit your asset allocation, and rebalance one’s portfolio, if necessary, by allocation money between debt and equity schemes. 2) Invest into dynamic asset allocation funds when it comes to incrementally deploying funds. 

By investing in this type of fund, an investor has the opportunity to take exposure to both debt and equity, wherein the investments will be based as per the attractiveness of that particular asset class. This construct may help render a better investment experience when markets turn volatile at higher levels. 

To sum up, 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 and in a bust invest aggressively. Currently we are in a boom and it is time to invest through dynamic asset allocation funds. It is desirable that one meets a financial advisor to understand and optimise on the opportunities presented by the market.

 

The author is executive director and chief investment officer, ICICI Prudential AMC