Time to take calculated risks

INVESTING

The Sensex has touched 6100 levels. Almost every investor must be wondering if it is the right time to still stay invested since the markets look overheated.

Well, the view from most experts is that despite the levels the markets are being driven by fundamentals. Nandan Chakbraborty, head of Research at Enam Securities, says that the market has already discounted corporate earnings for 2005-06. Which means that the market is not running on momentum but on good fundamentals.

This view was also echoed by others such as Narayan S A, managing director of Kotak Securities and Deepak Chhabria, head of institutional equities, at IL&FS Investsmart. Narayan feels that 6000 levels are sustainable though it might be accompanied with volatility.

Chhabria cautions investors not to buy for the short term. "Investors should buy now with a 12 to 14 weeks perspective rather than go in for a short term play, since we expect a lot of volatility in the near term."

Okay, so according to the experts the markets are not overvalued and there is still steam left. But, in spite of what all the experts are saying, investors still have a modicum of doubt about whether to enter the market NOW - if they are not already in it - and for existing investors whether to stay invested.

This is a tricky question and most experts are not inclined to give a straightforward answer - for the simple reason that it is difficult to do so. A good number of stocks have hit their lifetime highs - so the upside potential for such stocks is going to be much lower than their downside movement.

One can actually take cue from mutual funds. Fund houses - who have a fiduciary responsibility towards their investors, who have mandated them to increase their wealth - have been taking the safe way out and booking profits at each level and are at present sitting on a lot of cash.

A portfolio manager with a leading public sector mutual fund says, "So far as my clients' portfolios are concerned, we have been booking profits for them ever since the index crossed the 5000 levels. Our frequency of selling increased after 5500."

Translated into English, this means that once the Sensex crossed 5000 booking of profits would have come after every 100 point rise. After the 5500, profits would have been booked at every 50-point rise. And close to 6000 levels the frequency of booking profits increases.

This is because as the index goes higher, its sustainability at those levels become more uncertain. So a prudent investor should take advantage of the opportunities offered and try to encash as fast as possible.

At these levels a canny investor should ideally be 60 per cent invested and 40 per cent in cash. The cash in hand provides for sudden opportunities which arise in the form of an initial public offering, a stock which suddenly begins to look good for various reasons and so on.

However according to experts there are some sectors which are still undervalued at these levels. Bank stocks for instance.

Though the market has risen a lot, these stocks, on a relative basis, have risen very marginally. IT stocks led the rally for the last four or five months, and still look good for the rest of the year.

Telecom stocks have been largely rangebound and also undervalued. Auto ancillaries are also a good bet, according to experts. Finally as Chhabria and the others say, "invest with a long term horizon in mind."