Optimism has been driving the equity markets up in India. The retail investor, who was keeping a distance from equity, has started getting back to markets now. Equity oriented mutual funds received robust inflows in a past few months. This indicates that, the retail investor has regained some confidence in equity as an asset class. Although flow of foreign capital in Indian equities still remains positive, it has started cooling off, of late. At this juncture many of you like to know where the markets are headed here onwards.

Current market rally has happened mainly on the assumption that economy would gradually recover in coming years. So far economic indicators have been mixed but bad news pertaining to domestic economy has reduced considerably.

Nonetheless, constituting companies of S&P BSE Sensex are expected to record remarkable rise in earnings growth in coming years. As reported by Business Standard dated August 25, 2014, Bloomberg's consensus Earnings per Share (EPS) on Sensex for Financial Year (FY) 2014-15 is expected to grow at 16.6%. Moreover, FY 2015-16 is expected to register 19.4% growth. It is noteworthy that after the April- June quarter results for the current fiscal were out, EPS growth target for S&P BSE Sensex (for the Year 2015-16) was raised by 4.2%. Cyclical industries are expected to post sharp recovery in earnings.

What does this mean to markets?
Any earnings upgrade would entail that investors are fairly confident about better performance of the corporate Inc. Therefore, there is a possibility that, such news may draw even more investors to markets. Now the question is whether those who have not yet deployed money should invest when markets are at all-time high; or should they wait for correction to set in?

How to interpret current situation?
Speaking about the recent upgrade in the earnings of Sensex companies, PersonalFN believes, you need to stay cautious and shouldn't get tempted to investing aggressively. The Bloomberg's consensus EPS for Sensex companies has been predicted as 1564 for 2014-15 i.e. for the current fiscal while that for 2015-16 has been 1867. At present the S&P BSE Sensex hovers at 26,500 levels. In other words this means, on forward looking basis, markets are expected to trade in the band of P/E multiple of 14 to 17 times. This might give you a feeling that, the current rally in the equities is justified and may have much steam left considering moderate forward valuations. PersonalFN is of the view that, investing in equities directly or through mutual funds based on the flow of positive news should be avoided.

What should investors do?
PersonalFN is of the view that, there are enough indicators that suggest going wouldn't be easy for markets. Some of them are listed below;

• Weak asset quality of Indian banks and governance related issues
  
  
• Sticky and high inflation
  
  
• Possibility of end of monetary stimulus programme in the U.S. and strong dollar
  
  
• Geo-political tensions and volatility in crude oil prices
  
  

Any negative news on aforesaid fronts may potentially affect the investors' sentiment and trigger deeper correction. On the contrary if economy continues to do well and corporate profits grow as expected, markets may not go down much.

Be an investor and NOT a speculator
PersonalFN always discourages investors from speculating on any particular event. At PersonalFN our ethos remains unshakable. Investors should focus on achieving their financial goals. One should chalk out a personalised asset allocation and invest accordingly.

PersonalFN is of the view that, investors shouldn't speculate on the direction of the market and keep investing at regular intervals. Systematic Investment Plans (SIPs) offered by mutual funds is one of the easiest and the best ways of taking exposure to equity. Investors should stagger their investments. If you go excessively bullish on markets at this juncture when they are trading at all-time high, it may not help you generate attractive returns as valuations are high too.

Wealth creation is a process that requires you to follow your asset allocation meticulously and review your portfolio occasionally. Your selection of equity mutual funds or equity shares would largely decide as to how the equity component of your portfolio performs. PersonalFN provides various research services that may help you select a rewarding mutual fund for your portfolio.

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