Uncertainties due to the assembly elections in the next two months and the IPO overhang were among the major reasons for the correction. Against this backdrop, the following question was asked in a poll: At the current index levels of 5,300, your investment strategy would be to: Buy, Sell or Hold?
The verdict is clear, a majority of the respondents (58%) indicated that they would buy at the 5,300 levels. A smaller number, on the other hand indicated that it would like to hold on to their investment portfolio without making any fresh investments.
The rest opted to sell their holdings. While one may not be surprised at the poll results, as investors may still be mindful of the fact that the indices had crossed the 6,000 levels, investors need the correct approach at these levels to attain meaningful returns over their investments.
Over a year ago, the 'India story' was more of how undervalued the whole stock market was. That is to say that despite the growth potential of Indian companies, the markets had not given a fair valuation to the same.
Currently, the 'India story' is primarily that of growth and to a very small extent that of value. There are few companies that one would find that are undervalued on a relative basis at this point. So this is one of the essential factors that investors, who are willing to buy at this stage, need to realise. If one is making fresh investments, one has to be content with the fact that he or she may not get the returns that has been seen during 2003.
On the contrary, if one were investing in a stock expecting the growth story to pan out, then he would have to keep a long-term perspective in order to garner sufficient returns.
Investors also need to understand that in the short-term, there may be events that may distort the functioning of the markets. For example, the recent IPO rush and the uncertainties of elections are cases in point.
What is being indicated here is that if an investor is keeping a long-term perspective, he does not need to worry 'too much' about short-term distortions. However, this does not mean that the investor has to turn a blind eye to the implications, if any, that these events have on his investment choices.
By this it means that if there is an event like a change in policy decisions that have been announced by the government, that can impact the sector, an investor needs to ascertain whether the implications are short-term or long-term in nature and whether it is adverse or favourable for the company/sector he or she is invested in.
For example, the power sector reforms that have been initiated by the incumbent government over the last 2-3 years, may take a while to actually benefit the power sector and the benefits or otherwise for different companies may be distinct.
Thus, the bottomline is that investors, who intend to invest at these levels, must do so keeping in mind the growth story rather than the under-valuation story. Also investors need to understand that there are no free lunches in this world and this applies to the stock markets too.
One needs to understand that investments in equities are a risky proposition and a higher level of involvement is required on the investor's part in order to realise consistent and adequate returns over a long-term period. The message here is that while short-term distortions may exist in the market, investors should not be completely oblivious to the same.
The implications, on their respective sectors and stocks, have to be studied and factored in to the prospects of their investment.
Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.
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