Investing in Sensex at 80,000 Levels: Strategies and Considerations for Maximizing Returns.

Synopsis

Pay attention to what you are purchasing rather than getting sidetracked by the bustle of the market or uneasy at high points.

Sensex exceeded 80,000! Any extreme market can cause intense emotions. Some people in this bull market waited for the market to correct, but they are now unable to defend their entry at these prices. They wish they had invested more, and those who did invest wish they had done so sooner. Those who sold are sorry they did so. A few people are expecting a crash. Additionally, some people think that the market will always rise.

But the real question is, have all the benefits of the India growth story not already been factored into the market given present valuations?

The 12-month forward price-to-earnings (P/E) ratios were examined in the RBI's Financial Stability Report. The results showed that, since 2019, Nifty Midcap 100 has been trading one standard deviation over its historical average, while Nifty 50 and Nifty Smallcap 100 have been trading very near to their historical averages.

Only when we average over a cycle—that is, before there have been any structural changes—can we use historical averages. What structural alterations have been noticed, then?

MODIFICATIONS TO THE DOMESTIC ECONOMY'S STRUCTURE

The implementation of the Goods and Services Tax (GST) and the reduction of the corporate tax rate, along with the PLI schemes aimed at promoting manufacturing and defence indigenization, the emergence of Global Capability Centres for services exports, the enhancement of the nation's physical and digital infrastructure, and the adoption of capital markets by ordinary investors.

MODIFICATIONS TO THE GLOBAL ECONOMY'S STRUCTURE

high interest rates maintained by international central banks, geopolitical pressures manifesting in trade disputes and shattered supply chains, weak global economies, China's slowing growth, and multinational corporations moving their production chains abroad, with India gaining significant advantages from this practice.

LIQUIDITY COMES NEXT

As foreign and Indian investors swarm the market, the mood is extremely positive. A recent report by Kotak Institutional Equities tracking foreign fund flows states that inflows into India's dedicated funds listed overseas totaled US$2.3 billion as of March 2024. The proportion of India allocated to global developing market funds increased from about 14% to 18.3% in March 2024.

According to the Financial Stability Report, risks related to geopolitics, tightening of global financial conditions, global spillovers, and risks arising from technological and climate-related factors might all affect the flow of capital to India's financial markets.

SO, WHAT IS THE BEST COURSE OF ACTION?

Phases of returns are only apparent in retrospect. You must view things in the long run.

Like pendulums, stocks fluctuate between being vastly overvalued and significantly undervalued. A complete swing of the pendulum can take a year or more.

There were many undervalued sectors a few years ago. That's not the situation anymore. Very few undervalued industries exist now. The largest winners of today came from industries that were shunned a few years ago.

Significantly undervalued companies are available across a variety of sectors, despite the fact that there are currently very few significantly undervalued sectors.

When the stocks you have chosen are falling and drastically undervalued, buy them. When the stock becomes noticeably overpriced and starts to rise, sell it or at least cut down on your holding.

To achieve healthy returns, it is essential to comprehend valuations or how they are arrived at. Consider stocks as a business rather than as a financial instrument. Invest in cheap, high-quality stocks with a long time horizon.

Consider your returns carefully. Over the past four to five years, a number of astute investors have produced compound annual growth returns (CAGR) of about 40%. Because of the high valuations, it will be difficult to create even a 20 percent CAGR over the next three to four years.

Don't buy anything out of FOMO.

Don't ever sell in a panic.

Author : Prayas Sarkar, MBA Finance