Markets at new high: 5 mantras to follow to create wealth

Amitabh Tiwari
·5 min read

The BSE Sensex has scaled new heights, having topped the 52,000-mark, too before slipping a wee bit. The markets have been on an upswing since the growth-oriented Union Budget was announced by Finance Minister Nirmala Sitharaman on February 1.

The markets had breached the 50,000-mark before the Budget but then corrected sharply by up to 8%.

The slew of structural reforms announced in the Budget, huge government spending and a roadmap for privatisation has led to a rally of 13% in the Sensex.

As many as 185 stocks have hit fresh 52-week high. The rally has been broad-based with BFSI and realty sectors outperforming the benchmark.

Foreign institutional investors, who were net sellers in the run-up to the Budget, turned net buyers by pumping in more than Rs 20,000 crore in the cash segment of the Indian equity markets, pushing benchmark indices to fresh record highs.

While some analysts are of the opinion that India has entered a ‘super bull run’, others feel that markets are overheated and a big correction is round the corner.

So what is it that you should do in such times if you already own stocks or want to enter the stock market?

Here are 5 mantras to follow:

1. Stay invested, don’t book profits

India’s long-term growth story is still intact despite the challenges posed by the pandemic. The Sensex could even touch the 100,000 mark by 2028 or 2030, according to some experts.

If you are a long-term investor having a horizon of 5-10 years, and don’t need money for emergency use/milestone expenditure, then you should stay invested to reap further profits. You have to start thinking in decades if you wish to build wealth via stocks.

If you have been investing money to fund your children’s education/marriage or for the purchase of a property/car in this year, then this is the right time to book profits. You should not fall prey to greed in a bid to make some extra bucks by making an attempt to time the market.

People who have ongoing SIPs should continue with them, as in the long run, the escalating cost of new purchases will even out. The fact that interest rates are low and there are not many viable alternatives in other asset classes lends credence to this strategy.

2. Don’t make fresh purchase as valuations not cheap

The Nifty50 P/E ratio has almost doubled from 18.8 in April 2020 to 35 in February 2021. So valuations are not cheap. This is not a time to make fresh purchases of stocks. Buying stocks at 52-week highs is not a good strategy.

Many people invest in good quality stocks through systematic equity plans, they should be continued with and not stopped. Such an investment is not only beneficial for investors in both high-market and low-market situations, it also brings the risk at an average level.

3. Buy in dips

Equity market is all about patience. One should wait for the markets to correct and buy in dips. Any decline presents opportunities to accumulate quality stocks.

Quality stock according to me is a scrip which has delivered consistent compounding of 25%+ in the last 1-3 decades, has sound management which has displayed ability to meander through cycles and would survive in the post pandemic era.

One can invest ‘x’ amount of money in portfolio stocks or index funds for every 1% decline in the index, or contraction by every 500 points. This is just an example. You can have a threshold of 250 points or even 100 points.

4. Index funds the best option

Do you know that 57% of the large cap funds have underperformed both the Nifty50 and the Sensex in the last 20 years? If you are an average investor who doesn’t understand a lot of financial terms, or if you don’t have the time to track news regarding stocks on a daily basis, the best strategy is to invest in index funds.

These are low cost funds which track the index, Nifty50 or Sensex and generate returns almost equal to them. Index funds try to mirror the exact composition of indices and hence generate similar returns.

Since inception in 1979, Sensex has given a compounded annual growth rate return of 17% p.a.. This by no stretch of imagination is low. Most sophisticated fund houses and brilliant fund managers would struggle to best this return.

5. Be ready for volatility

The market could be volatile in the near to medium term as it has already breached the year end targets of many brokerages. The rise in price of crude oil along with the hardening of bond yields across global markets poses near term challenges for the markets.

Volatility will be the order of the day and we have to be ready to face it. Most portfolios crashed by 30%-40% during March 2020. In one of a lifetime event, we have seen how markets have doubled from the lows.

Our actions shouldn’t be induced by short / medium term volatility if we have a long time horizon.

To sum up, markets at an all-time high present us with opportunities for wealth creation if we follow the 5 mantras for investment.