Be on guard in a falling market

Don’t make fresh lumpsum commitments, but continue with your SIP investments.

This morning, when the market slipped 250 points, some investors called Hemant Rustagi , CEO, WiseInvest Advisor, a mutual fund distributor and advisor. “Investors are worried if the market is going to correct further and what they should do,” said Rustagi. His advice: Stay put.

The stock market correction in recent days comes on the back of over 100 per cent returns in the last calendar year. Since the beginning of 2010, stock markets have stayed range bound.

The first signs of correction came last week. After a couple of small dips at the start of the week, the market tumbled over 400 points on January 21. Many investors were immediately reminded of the same day in 2008, when the Bombay Stock Exchange Sensitive Index, or Sensex, fell 1,408 points.
 

ON THE SLOPE
	Sensex	Nifty
Jan 18, ‘10	17,641.08	5,274.85
Jan 19, ‘10	17,486.06	5,225.65
Jan 20, ‘10	17,474.49	5,221.70
Jan 21, ‘10	17,051.14	5,094.15
Jan 22, ‘10	16,859.68	5,036.00
Jan 25, ‘10	16,780.46	5,007.90
Jan 27, ‘10	16,289.82	4,853.10
Chg in points	-1,351.26	-421.75
Chg in %	-7.66	-8.00

Since the beginning of last week, markets have slipped quite sharply. The Sensex fell from 17,641.08 to 16,289.82 – a dip of 1,351.26 points or 7.66 per cent. The National Stock Exchange S&P CNX Nifty fared worse. It slipped from 5,274.85 to 4,837.15 – a fall of 437.70 points or 8.3 per cent.

No wonder, investors have started calling their advisors. Some are worried about existing investments. Many others, who missed the rally, are seeking new opportunities.

According to a Kolkata-based broker, many investors already have overbought positions. “For such people, I am advising taking some profits (if it is there). Otherwise, it is better to hold on,” he said.

He said many investors in direct stocks bought the mid-and small-cap theory and overexposed themselves. But if people are seeking opportunities in the short-term, he advises one should only look at beaten-down index stocks for the time being. The reason: Whenever the market bounces back, it will be led by these stocks.

Other experts say investors should be cautious. Says investment advisor Gul Tekchandani, “It is too late to exit and too early to enter.” According to him, investors who have not exited the market or booked profits till now should not rush to sell. “There could be a bounce back in the days to come. But, that will not have much meaning,” added Tekchandani.

Similarly, entering now does not make much sense because there could be a further correction, allowing investors to enter at lower levels.

Others feel that timing the market is not at all important for the long-term investor, especially those who have entered the market through mutual funds (MFs). Rustagi feels that for long-term investors, it does not make sense to view the market with a short-term perspective. “If someone is investing with a five to 10-year horizon, it makes little sense to rejig the portfolio. Buying more because the market is falling or selling in a rally does not help,” adds Rustagi.

If you are investing through systematic investment plans (SIPs) of MFs, there is no reason to stop. Investing in a falling market will ensure more units of the scheme, because of a lower net asset value (NAV). The additional units will give better returns when the market turns around.

If you are a new investor in MFs, you can start SIPs. However, a lumpsum investor need not put in the entire money in one go. Instead, invest in tranches or wait for a while. The market outlook, at least till the Union Budget, is not very certain. Most experts feel there could be some more correction before a recovery ensues before the Budget.

“Much of this correction is due to the fact that there is a feeling that the stimulus package given to various sectors might be withdrawn in the Budget. Sectors like automobiles and real estate, which had shot up significantly, are seeing profit-booking,” said a research head of a brokerage.

After being directionless for almost three months, the markets have started showing signs of activity. However, retail investors need to remember that there is no need for any rushed immediate action. Market experts like Tekchandani say that given the uncertainty in the immediate future, retail investors need not bother about the indices for a couple of months. Perhaps, the best strategy.