Sensex hits 30,000: Should you book profits, hold or enter now?

Mid- and small-caps have turned expensive. Further investments should be staggered

It was Wonderful Wednesday for stock market investors. With the BSE Sensitive Index, or Sensex, closing at 30,133 points  — the highest ever, many would be sitting on neat profits. But there would also be multiple questions for investors  — should I book profits, should I continue or should I enter now? 

The first thing to remember is that trying to predict stock market movements is not the smartest thing that any investor should be doing at this point in time. There is always euphoria when a milestone, such as 30,000 points, is reached. And if you are not a trader, who buys and sells stocks regularly, there isn’t too much to do. At best, make a few changes to your portfolio to cap the downside, if you expect a correction. 

“Where markets go from here depends on corporate results. Earnings need to grow at double digit in the current financial year to justify the current market valuations. You will see a correction if they don’t,” says Rakesh Tarway, head of research at Reliance Securities.

For those who take direct exposure to equity, Tarway’s advice is: “Look at large-cap stocks now as mid- and small-cap stocks are very expensive. There’s still some comfort in the large-caps.” Whenever the markets rise, mid- and small-cap stocks rise faster than index companies, and they fall at the same pace when markets decline. If you are in mid- and small-cap stocks that have already crossed the target you had in mind, start booking profits slowly. Don’t get greedy and wait for the price to climb further.

Experts also caution that investors should not time the market by booking profits now and then sitting on cash to re-enter the market at a time when they have valuation comfort. They could miss out on the potential upside if markets rise.

Ensure that your further investments are staggered whether you are putting money in stocks or mutual funds, advises Mayuresh Joshi, fund manager at Angel Broking. Joshi feels that the market could consolidate in the next two months and investors can buy on corrections. “While large-caps should be preferred now, if an investor is looking at mid- and small-cap stocks they should stick to three parameters. One, the companies should not have faced any corporate governance issue. Two, they are in consumer-facing business,” says Joshi. He adds that there should be visible growth prospects for the next two years. 

Mutual fund investors should continue with their systematic investment plans, or SIP, without worrying about the market movements. “Investors should come into equity mutual funds with at least a five-year investment horizon and invest via SIP. The latter can help deal with equity market volatility and also allow them to benefit from the power of compounding,” says Anand Radhakrishnan, chief investment officer–Franklin Equity, Franklin Templeton Investments–India.

It’s likely that your asset allocation has changed after the markets touched new highs and interest rates went south. If your portfolio is due for a relook at the beginning of the new financial year, this could be the right time. But do keep taxation in mind. Equity investments sold within one year of purchase attracts a short term capital gains tax of 15 per cent. There’s no tax if you hold it for more than a year. “Long-term investors who have not seen a drastic change (of over 15 per cent) in their asset allocation can avoid rebalancing. Interest rates in debt instruments are so low that staying in equity for the long term makes more sense,” says Arvind Rao, a financial planner and founder of Arvind Rao and Associates.