On Wednesday, the benchmark Sensex at the BSE hit a new high of 30,658 and the market cap of all BSE listed companies breached the $2 trillion-mark momentarily for the first time ever. Although these developments are reflective of the buoyed sentiment in the market and are also reassuring to both existing mutual fund investors and those directly involved, there are many who seem undecided if they should remain invested or go for some profit booking. While experts point out that those with an investment horizon of 7-10 years should not look to make an exit, there is a view that if someone is uncomfortable and wants to book some profits in any case, they can withdraw a part of their portfolio to either invest in a fixed income product or use it to pre-pay their home loan, car loan or personal loan which is attracting a higher interest payable. Some are of the view that at a time when fixed income returns are not generating decent gains, real estate and gold not showing much promise and foreign institutional investors (FII) and domestic institutions perceiving India as a relatively calm economy with future growth potential, equities are the best place for retail investors.
“I don’t see any sign of an overheated market as it is not fully-invested. I think there is no option currently better then equities for Indian retail investors. All the noise around high valuations should be viewed from the fact that the price of a stock is based on discounted value of future cash flows and if the market expects higher earnings in FY19 and FY20 then the valuation will also be higher,” said CJ George, MD, Geojit Financial Services.
Performance over last 5 years
It has been a very strong rally. While the Sensex at BSE rose from 16,070 on May 17, 2012 to 30,658 on May 17, 2017, the broader Nifty at the National Stock Exchange rallied from 4,870 to 9,525 in the same period.
Illustratively, had you invested Rs 10 lakh as a lump-sum into a mutual fund tracking Nifty 50, in May 2012, then in last five years the money would have grown at a compounded annual growth rate of 14.36 per cent and your investment would have nearly doubled to Rs 19.55 lakh. On the other hand, if you have started a Rs 10,000 monthly SIP in the same scheme five years ago, your overall investment corpus of Rs 6,00,000 would have grown at a the rate of 11.9 per cent and would have aggregated to Rs 8.14 lakh.
Many diversified equity schemes along with small and mid cap schemes have generated far superior returns in the same period as they outperformed the benchmark indices. In fact, the average return (CAGR) for large cap equity schemes stood at 16.57 per cent over the last five years, and that for mid and large cap oriented funds stood at 25.4 per cent and 30.41 per cent respectively.
In both the cases, returns are much higher than any other asset class has generated. With such a strong bull run and markets trading at higher valuations, some relatively conservative investors may get the feeling that the returns have surpassed their expectations and their target, and therefore, may want to book some profits.
Should you look to exit and where to invest?
George said that markets are not overheated and the current liquidity is likely to continue as both FII and domestic investors have strong view on Indian economy. “FIIs view India as a relatively calm economy with political stability and they have high confidence on future earnings potential. Also, while retail inflows continue, some of the large mutual funds are currently holding high cash at around 15 per cent to capitalise on the opportunity that comes by way of a correction in the market,” said George.
As the optimism continues on potential for strong returns in the medium to long term, there is a consensus that investors should consider to book profits only if their financial goals (for which they started their investment) fall over the next two to three years.
“As the market PE (price of earnings ratio) rises, investors should elongate their investment horizon. However, if some investors feel that they would need the invested amount over the next 2-3 years, they can go for redemptions and route their investments into fixed income instruments,” said Vishal Dhawan, CFP and founder of Plan Ahead Wealth Advisors.
While there may be some who have a 10-year investment horizon but still want to book some profit from their existing stocks on account of discomfort from current rally, experts suggest they may go for a part redemption and ideally look to repay some of their loans. “Ideally, such players too should remain invested but if the individual has decided to do so, he can redeem a part of the investment and use it to repay home loan/car loan or personal loan where he/she is paying a much higher interest rate,” said Dhawan.
Experts opine that pre-payment of a home loan at 9 per cent or a car loan and personal loan at 10 per cent or 12 per cent respectively, is better than investing in fixed deposits as the post-tax return for an individual falling in the highest tax bracket would come to around 5 per cent.
Another option is to evaluate the portfolio of stocks and mutual fund schemes and shift from one theme to another. “Instead of looking at valuation of the markets, investors should look to shift into themes that show better opportunity. Mutual fund investors should move from small cap schemes to large cap or diversified schemes for fresh allocations whereas stock investors can look both large and small cap companies that are into sectors with strong potential for growth,” said George.