Life at 30,000 market level: It's time to buy on arithmetic, not optimism

Though equities are performing, you should not raise your exposure to just this asset class

When it comes to creating long-term wealth, nothing beats asset allocation. Though this topic is often discussed, Indian investors tend to lean heavily towards traditional investment options when it comes to making investment choices. Equities are hardly a point of consideration, given the fear of losing money in the market. 

Over the past three years, there has been a change in this sequence of consideration. Over the course of last one year, retail investors have consistently flocked to the market, taking the industry SIP book to a high of Rs 4,200 crore in April 2017 – all through SIPs – show data as on April 31.

However, at this juncture, it is important to remember that just because the equities segment is performing, it doesn’t mean you increase your exposure to this one particular asset class considerably. With the benchmark indices currently hovering around all-time highs, this is the time for a prudent investor to exercise caution. That is because market valuations based on various parameters like price-to-earnings (PE) indicate that the market is expensive, while on the basis of price-to-book (P/BV) and market-cap, it is courting slightly above its long-term averages.

For those who have been investing over the past few years, the portfolio gains might be quite handsome, pushing up the overall portfolio value. So, now is the time to make some prudent rebalancing to the portfolio such that the gains are fortified. This is because no asset class, especially equities, can guarantee gains at all times. In equities, volatility is sure to make a return and that’s when the going gets tough.

Therefore, for a retail investor, apart from SIPs into core portfolio funds, one could consider opting for dynamic asset allocation funds for lump sum investment as well as for any fresh market entrant. What dynamic asset allocation effectively does is help negate the burden of emotions associated in the investing process. 

For example, investors tend to pass opportunities to invest in a falling market, owing to the fear that they might accumulate losses if market heads further south. But, on the other hand, such funds can only increase allocations to equity, due to their in-built market strategy – that is ideally the right thing to do. 

Also, such funds give an investor the opportunity to take exposure to both debt and equity, at the same time, within a single fund. Here, based on certain parameters and the relative attractiveness of a particular asset class (between debt and equity), the fund manager decides the allocation accordingly (mainly model-based). This dynamic balancing between the two asset classes helps the investor build a shield against market extremes, making it a win-win situation for the investor across market cycles.

Thanks to the construct of the fund, investors are in a position to brace volatility by making the most of the opportunities presented in the market. So, life at 30,000 is all about being prudent and overcoming the physiological hurdle of wanting to dive headlong into equities. To conclude, remember the Benjamin Graham saying: “Buy not on optimism, but on arithmetic.”

The author is Deputy CIO (Equity), ICICI Prudential AMC.