In a matter of three weeks,two announcements by US Federal Reserve chairman,Ben Bernanke instilled contrary sentiments in the markets. While the foreign institutional investors fled for safety and the equities worldwide nosedived following Bernankes first announcement in June on the timeline of withdrawal of quantitative easing,his announcement of continuing with accommodative monetary policy on Wednesday gave a new lease of life to all asset classes including the equities.
The benchmark Sensex at the Bombay Stock Exchange that fell to levels of 18,500 in the trading sessions following his first announcement has,in a matter of two weeks,touched almost 20,000,leaving all concerns behind as Bernanke hinted at continuing with the easy monetary policy for now on Wednesday.
There is no denying that short-term volatility is here to stay and these are uncertain times both on account of global developments and also on the domestic front. But it must also be noted that amidst this volatility the Sensex has grown by 15.8 per cent over the last one year and the average return generated by large cap mutual funds schemes as on Friday in the same period is close to 13 per cent.
Experts feel that markets reaction to the announcements on quantitative easing is more of an over-reaction as everyone knew that someday the US Federal Reserve will stop it. But they also feel that foreign institutional money will flow into economies that are relatively better positioned than others in terms of their growth fundamentals and India definitely scores higher on that account.
Are equities back in favour?
To be true,a discussion with several market players shows their lack conviction in the markets for the near-term and they expect the volatility to prevail. All that they are hoping for is a clear mandate for one of the national parties in the general elections in 2014 and that the government puts the investment led growth agenda on the front foot.
We think that markets will be volatile in the next 12-18 months because of domestic political environment and global factors. However,once the interest rates come down and growth is back there will be big rally in equities, said S Naren,chief investment officer,ICICI Prudential AMC.
There are others who voice similar opinion.
I do not see the markets moving anywhere for now but in the medium to long-term India is a great story to be in and equities will generate good returns for investors, said a leading market expert.
There are some who feel that golds underperformance in the recent past along with the governments measures to curb gold consumption has had an impact on domestic demand for gold and investors will get diverted towards mutual funds.
Gold,which was a clear winner in terms of generating returns for investors between 2005 and 2012 has turned out to be a laggard in the recent past and over the last one year it has resulted into erosion in investors wealth by 10 per cent.
Where should you invest?
If the market seems unanimous on the view that situation in near term will remain volatile,they are also in unison on the fact that domestic equity markets throw great opportunity for the long term even as they face turbulence for now.
So where should you put in your money? The options are limited. The best bet in the form of gold seems to have lost its charm,the high interest rates on fixed deposits is not there any more and the maximum that most banks are offering is 8.75 per cent pre tax interest. Experts say that while Indians are underinvested into equities,investors should go for equities for the long term and as markets remain volatile they should invest through the systematic investment plan.
There has been a wide variation in equity performance. While Sensex leads with a return of over 15 per cent over the last one year,the returns generated by mid cap and the small cap index stands at (-)3.4 per cent and (-)15 per cent respectively.
Even within the Sensex companies there are some that have grown significantly while there are others that have been on the losing side.
Experts say that this gap between the performance of large caps and that of the mid cap and small caps leaves a big opportunity for investors to explore.
When the market turns for good,mid caps and small caps will rally and investment in schemes that invest into good quality mid cap and small cap stocks will generate good return in the medium to long term, said Naren.
There are others who caution against taking undue risk in the market. Do not look to make quick money into stocks. The markets are very volatile and one should wait for clarity to emerge on various fronts, said Aseem Dhru,CEO,HDFC Securities.
In the near term there is not one but several concerns. With rupee hovering at around 60 against the US dollar,a rise in crude oil price may just play the spoiler. There are concerns on impact of foreign currency debt on balance sheets of the Indian companies and the outcome of the general elections remain critical.
However,markets have discounted most of the factors as of now and any positive news flow will have the potential provide the thrust to the markets.
Market immediately discounts all the uncertainties and negatives and takes the positives with a lag. So any positive development will take its time and manifest as performance of equities, said A Balasubramanian,chief executive officer,Birla Sun Life AMC.
Rules for investing in current times
* Do not invest the money needed over the next two years into direct equities or equity mutual funds
* Do not look for short-term gains
* Do not play into momentum stocks
* Do not leverage and invest
* Research on the scheme and the fund manager and invest through SIP mode only
Returns over the last one year
Average return of mutual funds investing in large caps 12.8%
Average return of mutual funds investing in mid and small caps 5.6%
Average return of income funds 10.8%
Average return of gold funds -10.2%
Sensex rise in one year 15.8%
BSE mid cap -3.4%
BSE small cap -14.9%
All figures represent returns in per cent over the last one year as on Friday