Dealing with Sensex @ 20,000

Last Updated: Mon, Jan 28, 2013 05:26 hrs

When the Sensex hit 8,000 points in 2009, even most investors with surplus funds did not have the guts to enter the market," says the head of a brokerage house. Of course, the sharp fall in 2009 had made even the most seasoned investors go weak at the knees. Most were looking to cut losses, where possible, rather than putting fresh money into the market.

In comparison, equity investors' mood is much better now. And for a good reason, too. When the Bombay Stock Exchange Sensitive Index, or Sensex, hit 20,000 yet again last week, there was relief among market players. Most said that it would infuse confidence in retail investors and that they would re-enter the market with renewed enthusiasm.

For some time now, there has been significant buzz in terms of brokerages sending hot tips to lure investors. While the Sensex had fallen 25 per cent in 2011, it rebounded sharply by over 25 per cent in 2012. Then, this year began well. The Sensex has not only hit 20,000 but held firm. On Friday, it closed at 20,103.

But is it time to enter the market aggressively or put in a large lump sum? The answer from most investment experts would be an emphatic no for a lump sum investment. The reason: The upside for the Sensex from 20,000 to 30,000 or 40,000 is limited. In fact, most research reports suggest the index may get capped at 21,000-23,000. Citi, for instance, says it could hit 20,800; CLSA pegs it at 21,250 and Morgan Stanley, at 23, 069. In other words, returns would get capped at another 10-15 per cent from the levels of 20,000, if one goes by research reports.

Instead, go for small quantities, either through systematic investment plans (SIPs) of mutual funds or even with some brokerage houses. This will ensure that even if the market falls, you will not lose too much money.

For example, if you have a lump sum of Rs 1.2 lakh and want to invest in the stock market through the SIP route, the monthly investment will be Rs 10,000. If the chosen equity scheme has a net asset value (NAV) of Rs 100, you will get 100 units of the scheme every month.

If the NAV first falls and rises to Rs 150 during the year, you stand to make higher money, thanks to the additional units you have garnered. Even if the NAV rises 20 per cent, you stand to make higher returns through the SIP route for the same reason. Of course, the returns would be lower if the NAV stays above Rs 100 all or most of the time during the year. However, if there is high volatility, you stand to gain.

On the other hand, if you invest a lump sum of Rs 1.2 lakh in one scheme at the NAV of Rs 100, you will get 1,200 units. And at the end of the year, if the NAV is 120 or Rs 150, your returns will be 20 per cent and 50 per cent higher, respectively.

A point most market investors do not pay attention to: When the Sensex fell to 8,400 points in November 2008, it rose sharply to hit 17,464 points within a year in December 2009, giving over 100 per cent returns for investors who had the courage to enter at those levels.

Even if they had entered at 8,100 levels in March 2010, within nine months they would have doubled their money. As investment guru Warren Buffett put it: "Be greedy when others are fearful and fearful when others are greedy". Unfortunately, that requires a lot of faith when things are really bad and also great timing, which few investors can do consistently.

Another way of earning higher returns is by putting the entire money, Rs 1.2 lakh, in a liquid fund and investing Rs 10,000 every month through a systematic withdrawal plan. But remember that there will a one-time entry load of Rs 100 for investments of Rs 10,000 and above. Also, there will be an exit load each time you redeem units from the liquid fund and invest in the equity fund. However, investing in the liquid fund will earn some returns.

Market players admit the recent rally has seen many exits, as many entered at the highs of 18,000-20,000 in 2007-08 and invested lump sum amounts. Consequently, many have exited with small gains in recent times because the Sensex has regained the 20,000 levels after almost two years. Even mutual fund managers are facing constant pressure of redemptions because of this reason.

As V K Sharma, head, HDFC Securities, explains, there is often a lack of conviction among investors. "The Sensex is now at a new two-year high. While a new high attracts more investors to begin with, not many are able to buy with conviction. So, those who enter buy hesitatingly in small quantities and such late entrants to the party always have an eye on the exit and book profits at the first opportunity. Such rallies, as a result, do not have high participation and, therefore, can last longer."

Obviously, Sharma is not a fan of people who time the markets. "My view is that no matter how much you wait, whenever you will invest, you will always invest in uncertain times. Only those investors who believe in fundamental strength and add at dips can participate in a better manner in a rally.

The other segments that can participate relatively better are those traders who enter with pre-decided stop losses and exit plans."

Investing in the stock market, even in the best of times, is a matter of faith. If you have the faith, you will reap the rewards. If your approach is tentative, you will only skim the surface.

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