Right from the tea-vendor to the auto-rickshaw driver, now-a-days everyone is aware about the market levels. Open any newspaper or news channel; they are all talking about equities. Swayed by market rallies, a lot of "market experts" advise people to buy. However, whenever equities witness a downward trend, these very "market gurus" recommend a strong sell. In the process, retail investors get influenced by the market momentum and often land up buying high and selling low.
 

Investment made at market peak

(Data as on September 29, 2014)
(Source: ACEMF, PersonalFN Research)   Investment made at market low

(Data as on September 29, 2014)
(Source: ACEMF, PersonalFN Research)  

As can be seen in the first graph, if an amount of Rs 10,000 was invested in S&P BSE SENSEX on January 08, 2008 when the markets were at a peak, it would have grown to Rs 12,742 on September 29, 2014 giving a return of only 3.7% on a CAGR (Compounded Annual Growth Rate) basis, in a span of little over 6 ½ years.

On the other hand, an investment of Rs 10,000 made in S&P BSE SENSEX on November 20, 2008 when the markets were at a low, would have risen to Rs 31,472 on September 29, 2014 giving a return of 21.6% on a CAGR basis, in a relatively shorter span of almost 6 years.

You must understand that, investing when the valuations are stretched might give you suboptimal returns as the margin of safety is quite narrow. At present, although the trail P/E is sailing over 20 and valuations seem to have run-up ahead of fundamentals, investors are showing interest in equities. As per a research done by Business Standard, gross retail turnover on BSE (equities) has risen 77% to Rs 3,267 crore in comparison to the previous year. In the view of PersonalFN, market valuations appear expensive and buying aggressively at this juncture is not warranted due to narrowed down margin of safety.

Now, you would be wondering what strategy the retail investor should adopt.

PersonalFN believes that at present, staggering your investments would be a prudent approach while taking exposure to equities. You shouldn't buy aggressively, rather buy selectively. However, before investing it is imperative to first determine your asset allocation on the basis of your risk appetite and the time remaining for the fulfilment of your financial goals. You see, a prudent asset allocation, can enable you to earn optimal returns, minimise risk, have sufficient liquidity and even achieve your financial goals. PersonalFN believes that whether you are buying stocks or mutual funds you need to choose them carefully. While buying into mutual funds, opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. At PersonalFN, we believe that your investment discipline and asset allocation would decide your success in investing. So don't be fooled by market exuberance and be a smart investor.

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