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Retail investors have a good reason to worry, with the Sensex falling in the past three weeks. It is now nine per cent lower from its all-time high closing of 29,681.77 on 21 January. Many are contemplating whether this is an inflection point for the market, afflicted with bad news.
Experts have various reasons for the correction. Foreign institutional investors (FIIs) dumped stocks worth almost Rs 6,500 crore in May and Rs 1,100 crore in
April, not including the Sun Pharma block deals. They are selling because of the government's move to impose Minimum Alternate Tax, slow pace of reforms, poor corporate earnings and unseasonal rains that have hurt the rural economy. Then, there's the issue of rising oil prices and fear of Greece's default.
The bad news mounted as the weakness in the equity markets percolated to the currency market and the rupee breached the psychological 64-a-dollar-mark for the first time since September 2013, on Thursday. According to some, it could fall to 65 a dollar, as it is overvalued by nine per cent.
It's not only the broader indices - Sensex or Nifty - which have seen the correction. S&P BSE 100, S&P BSE mid-cap and S&P BSE small-cap are all down in the same proportion - around 10 per cent - from their peak this year.
Are retail investors' worries justified? Experts say this is a small technical correction, which has made the market attractive for investment. "Even if FIIs pull out of the market, that deficiency will be offset by the government's move bring Employees' Provident Fund Organisation (EPFO) money into stocks," says Arun Kejriwal, an investment analyst and founder of KRIS Research. FIIs bring about Rs 1.3 lakh crore to the stock market annually. The government is talking about Rs 1 lakh crore investments through EPFO.
Experts also point out that the rupee has been overvalued and due for correction. If it goes down to 64.5 against the dollar in the next six months, most people will consider it fairly valued.
The key reason for the stock market fall is the disappointing numbers posted by companies. "Prior to the results, investors were buying shares looking at a company's earning capability two years hence. The results have made people think more rationally," says an independent stock market analyst.
The fall has opened an opportunity for retail investors to buy stocks at more reasonable valuations, compared to three months earlier. "The market valuations are now 14-15 times of the forward price-to-earning (P/E). Historically, Indian markets are reasonable when they trade at 16-16.5 forward P/E," says Deven Choksey, promoter and Chief Executive Officer of K R Choksey Shares & Securities.
He suggests moderate to minimum risk takers should have 70 per cent of large-cap in their portfolio. If you have the ability for high risk, the portion of mid- and small-cap can be upwards of 50 per cent.
Usually, when the Sensex or Nifty sees a correction, small- and mid-caps companies fall more than the broader indices. The converse is true when the cycle changes.
This time, however, those who have invested in mid- and small-cap stocks for about a year are better off. Although these companies have seen better run-up in the bull market, the fall, around nine per cent, is in line with the overall market. "In the current fall, not one company in this space has seen more than 25 per cent correction," says Kejriwal. Going forward, these investors need to be ready for volatility similar to what markets witnessed recently.
Most investors in these stocks don't have deep pockets. They immediately exit when there is heavy selling, say experts.
If you're looking to invest in the market right now, analysts suggest spreading the investments and buying in parts. Narrow down on the sectors, then on companies, and buy the same thing over different periods. Investing in a deferred manner will help average out the price. For those looking at taking exposure to the market via mutual funds, it always helps to invest via a systematic investment plan.
As the market has seen a lofty rally in the past two years, investors need to tone down their expectations on returns. In the previous financial year, investors easily made an average of 25-30 per cent.
This year, they should expect a 15 per cent return as, the markets will see their share of similar technical correction. And, on every dip, be ready to buy.
