Indian stock markets witnessed a mixed performance last week. While major indices like the Nifty 50 hit a new all-time high, extending their winning streak to seven weeks, broader markets like mid-caps and small-caps faced a correction, snapping their six-week rally. When markets reach all-time highs, investors often feel uneasy and worry that it may fall from the current levels.
And the big dilemma is this: What if you decide to reduce your equity exposure but the market goes up further to hit a new all time high? What if you don’t reduce your equity exposure and the market falls?
Does a market high automatically mean a fall?
FundsIndia’s research indicates that in 57% of cases, the one-year returns following an all-time high were positive.
“If you expect Indian equities to grow at say 12% per annum (in line with your earnings growth or GDP growth expectation), then mathematically it means the index will roughly double in the next 6 years, become 4X in the next 12 years, and 10X in the next 20 years. In other words, the index will inevitably have to hit and surpass several all-time highs over time if it has to grow as per your expectation. So there’s nothing special or frightening about all-time highs,” said Mehta.
Flashback 1: Between 2008 and 2011, Nifty 50 was stuck at 6,000 levels for some time…
For the last 24+ years, FundsIndia checked for all the periods where Nifty 50 TRI hit an “all-time high”. FundsIndia then checked the 1-year, 3-year, and 5-year returns following those “all-time high” levels.
“The Nifty 50 TRI gave positive returns 100% of the time on a 5-year basis if we had invested during an all-time high. The average 1Y returns, when invested in Nifty 50 TRI during an all-time high, is ~14%! (This gets even better for active funds with 20Y+ existence – HDFC Flexi cap fund and Franklin Flexicap fund – the average 1Y returns were much higher at 18% and 20%),” said Mehta.
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For Nifty 50 TRI, 47% of all-time highs were followed by 1-year returns of more than 15% -
57% of the times – the 1Y returns exceeded 12%
This clearly shows that “all-time highs” automatically don’t imply a market fall and in fact, the majority of times, market returns have been strong post an all-time high.
So what should an investor do right now?
Mehta has the following advice for invstors:
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Maintain your original split between Equity and Debt exposure -
If your Original Long Term Asset Allocation split is for eg 70% Equity & 30% Debt, continue with the same (do not increase or reduce equity allocation) -
Rebalance Equity allocation if it deviates by more than 5% from the original allocation, i.e. move some money from equity to debt (or vice versa) and bring it back to the original asset allocation split -
Continue with your existing SIPs -
If you are waiting to invest new money -
Debt Allocation: Invest now -
Equity Allocation: Invest 30% now and stagger the remaining 70% via 6 Months Weekly STP
First Published: Jul 22 2024 | 12:43 PM IST