Homework essential amid raging bulls

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The ongoing bull run in the Indian markets is grabbing eyeballs of investors across the globe as India turned out to be the best performing market in the world so far this year, having risen over 22%. Unique investor accounts in India crossed the 8-crore mark with the last one crore accounts being opened in a span of just 107 days. The ongoing rally is fuelled by revival in the level of activities and with many economic indicators reporting improvements, increased pace of vaccination, global flow of liquidity, Indian equity markets are on a one-way rally over the span of the last 18 months.

There seems to be nothing stopping the bulls despite the dizzying valuations and concerns of gradual pulling away of global liquidity as the Sensex closed above the 60,000 mark for the first time. In fact, global wealth management firm Credit Suisse believes that the premium for the Indian equities are expected to continue given the market’s improved fundamentals.

But conventional wisdom dictates that as exuberance increases investors need to be increasingly careful while entering the market and understand the details the companies, processes and instruments in which they plan to trade or invest. That apart, investor also needs to understand that they need to reduce the beta (a measure of a stock’s volatility in relation to the overall market) of their portfolio by cutting exposure to small and midcap stocks, while adding more large cap companies. The idea to stay invested in blue chips or large caps is that they act as shock absorbers to tide over the volatility.

Besides investors should not invest in stocks based on tips, or hearsay, as at higher levels the probability of incurring losses increases. Instead, they should step up their homework and invest only in those stocks where they understand the business, that hold sizeable market share and have ample scope of growth opportunity with a respectable promoter pedigree.