It is a good time for NSE Nifty. Nifty ended 2016-17 with 18.55% in gains and began 2017-18 with a record-high of 9,221.80. This is in response to our currency getting stronger, a strong political center, the historic GST, an increasing enthusiasm for IPOs, elevation in the earning progression and the diminishing commodity prices.
Foreign investors have pumped in Rs 49,000 crore of shares last year and the Rupee is holding strong against the US Dollar. Also, domestic investors, have invested Rs 6600 crores, mostly because of the lead by mutual funds. Moreover, on April 25 Nifty hit an all-time high of 9300! This is in-part credited to the banking and auto sectors, and some NBFCs performing exceedingly well.
The everyday investor is wondering, where should he/ she invest with the current market conditions? Let us look at a few areas to invest in.
Since Nifty is at its highest, is it safe to invest?
One thing is for certain, the current growth is fueled mostly by liquidity when compared to earnings growth. The room for price to earnings ratio (P/E) is limited. The higher price to earnings ratio have arrived in a period when the growth in earnings since the past two years has been close to zero. Since 2007, India’s nominal GDP has grown by three and a half times. Yet, NIFTY has grown by barely 50%. There is catching up to do as the nominal GDP continues to grow at 12%.
This may not be the best time to celebrate and invest in Nifty as Capex, bank credit growth and capital efficiency are at a multi-year low. Additionally, even though reforms have been initiated by the government, they will only bear fruit in the years to come. Expecting immediate results from the government’s policies is a foolhardy notion.
India is a nation that is indeed growing at a rapid pace. We have a young population with an average age of around 29, much lower than other Asian nations such as China and Japan. Both Japan and China have witnessed falling dependency ratios and a consequent economic boom due to the same. India seems to be experiencing a similar period. Hence, there will be periods when the valuation is higher than average and we will also face swift corrections. This is the period to invest wisely and create wealth for our coming generations.
Even though Sensex and Nifty are growing exponentially, various sectors are growing slower. So what to do?
Choose the right stocks
Selecting the perfect stock for the long-term is the challenge. Do not just put all your money on a popular stock or based on advice from a family relative or friend. Choose companies that have proven to work in the long-term or companies that have a potential to grow.
Diversify
Diversify between small, mid and large-cap stocks. Small and mid-cap stocks should be 30% of your portfolio. Large-cap stocks are safer while small-cap may have high risks, so diversify to reduce risk. Large-cap stocks are valued at a P/E multiple of 23 times, close to 20 (their 11-year average). Mid-caps are pricier at P/E multiple of 30 as they averaged at 18 over the past 11 years. With mid-caps being overvalued, stick to large-cap funds currently for best returns.
What other areas of invest should you consider?
Despite a strong market, many people are not comfortable investing in the stock market. Even if they can handle the risk they do not appreciate the research that goes into choosing stocks. For people seeking good returns, at lower risk and without much research – mutual fund investing is the best option. You can direct a fund manager to pick your stocks. The manager can buy, sell or hold your stocks after you give the approval to do so. Look at the mutual fund’s long-term performance, investment costs and the underlying assets. Another benefit is that you can automate SIPs that will leave your bank account every month, reducing further effort from your side.
Investors can grow their portfolio and work towards fiscal success by way of systematic investing and ideal use of current opportunities by capitalizing more when correction is because of events having short-term ramifications. Even in a market that is rising, there are multiple stocks that do not do well. The current growth in stock market is not an overall growth so choose your investments wisely!
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