Use market pullbacks to exit, reinvest

Non-performing stocks, MF schemes can be exited; reinvest in a staggered fashion.

There have been several instances this year when the stock markets staged a sharp pullback of over five per cent, providing opportunities to investors to either exit or realign their stock portfolios.

Saurabh Mukherjea, head--equity, at Ambit Capital, says: "In such times, investors should take profits in high beta or second line stocks (mid and small caps) and tricky sectors such as real estate, infrastructure or construction, where the prospects look shaky." If you can't book profits, one can book some losses as well if these are not so high, especially in companies not being favoured.

A volatile market, with a downward bias, will always provide a number of such opportunities. This is the second time this month that there has been a sharp bounceback. Earlier this month (between October 5 and October 14), the Sensex rose more than 1,200 points (8.17 per cent) in seven sessions. Similarly, the index had risen over 1,300 points (8.31 per cent) between August-end and the first week of September, over eight trading sessions.

Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services, says such times should be used to exit scrips where the price rise is higher than the firm’s fundamentals. A lay investor can rarely judge this. "Or, book profits if the stock price has moved above the levels you had bought at," adds Oswal.

In the past month, among Sensex stocks, Tata Motors has a little over 32 per cent, the most. Sterlite Industries, Tata Steel, Jindal Steel and Power, Bajaj Auto, DLF and Infosys have seen a double-digit rise. Some scrips are also near their 52-week highs, presenting a good opportunity to book profits.

Given the volatility, defensive sectors such as fast moving consumer goods (FMCG) and healthcare have also risen. In the last one year, the BSE FMCG index has risen nearly 16 per cent. The Sensex fell 11 per cent in a year.

Once you have booked profits/losses and raised cash, should one let it stay idle in banks? The answer is clearly no. While fixed instruments are in vogue, you could also look at re-entering the market at lower levels. Prashanth Prabhakaran, president--retail broking at India Infoline, says: "Long-term investors should follow a wait and watch policy, booking profits when the opportunity arises and buy at lower levels." After every pullback, mostly event-based, there is a correction due to profit booking.

But, buy in tranches is the advice. "With the Reserve Bank of India unlikely to hike rates further, we could see these cooling off next year. Then, the stock markets may rally. Investors can buy equities in small portions at different levels around each pullback," says C J George, managing director at Geojit BNP Paribas Financial Services. Buying in a staggered manner will help beat uncertainties to an extent and help in cost averaging.

And, certain contra sectors like banking stocks, available at attractive valuations, can be a good bet. If rates were to cool off, this sector and other rate-sensitives like automobiles are likely to benefit the most.