Caution is always a welcome word when you are dealing with equity . After the October 2008 crash, it is probably one word many investors will not forget for a long time. As the markets have been surging against expectations, some expect a correction in the markets across the globe.
Though every correction has managed to reverse in a matter of a few sessions, the undercurrent hasn't been convincing for individual investors to take the plunge. As a result, it is the high networth individuals (HNIs) and foreign institutional investors (FIIs) who have managed to benefit from the recent rallies.
In fact, if you were to go back to the same period last year, the picture was completely different. The markets across the globe were in a downtrend and it was no different for the domestic markets. In fact, the stock prices were moving in a narrow range and some of the other markets like commodities and crude oil too were not in good shape.
Recent uptrend surprising
As you would have noticed, 12 months is a long time in the equity markets and the mood has changed from extreme pessimism to cautious optimism. The word 'optimism' is used as the run-up in certain stock prices hasn't been justified.
Even the managements of certain technology companies have shared a similar view and have expressed concern over the recent uptrend.
While there is no doubt that the mood in the markets is far better than what was there in the previous year, the quick turnaround in the last few months has been the surprise package.
Much of the rally has been on account of improved liquidity and global market mood. For equity investors, the good news is that the medium to long term trend is positive though there could be surprises in the short term. In fact, the actions of certain mutual fund houses, which have preferred to sit on cash, vindicate this line of thinking.
Formulating investment strategy
In such an environment, it is a difficult task for individual investors to take a call on their investment strategy. In fact, recently, an investor was asking whether it makes sense to go for a systematic investment plan (SIP) as the markets have begun to rise. Those who have made money from SIPs would understand the benefits of SIPs as it helps them build a corpus over the long term.
In fact, those who have signed up for SIPs should worry little about the market environment as SIPs in general pay over a long term. They can also be very rewarding even in the short term when there is a sudden spike in prices. That was the case for those who signed up for a SIP over 12 months ago as 6-8 instalments were made during the downtrend.
However, such fantastic returns opportunities arise once in maybe 3-5 years and that is precisely the reason why you should stick to SIPs.
Long-term uptrend looks intact
The current environment is also good for medium-term investors, as the long-term uptrend looks intact in the markets. Even if global economies are not yet out of the woods, the worsening effect seems to have come down and that is a big plus for equity markets. There are many who believe that economies are unlikely to get back to boom conditions in a hurry, while many also believe that 2010-11 could be the year of a real turnaround.
For the time being, much of the revival in sentiment has been on the back of improved efficiency in the corporate sector, rather than a volume growth. The stock markets are willing to take that and are hoping that the exuberance is not misplaced.