Markets are trading at record highs with the Sensex at near 37,500 levels, and the Nifty having comfortably breached the 11,300 levels this week. Here are 5 reasons why investors should book profits and move money at least partially into debt.
1) Protection of capital amidst rising interest rates
Interest rates are rising, and the bad news for markets is that it could rise even further.
Today, it is not too difficult to get interest rates of 8.50 per cent to 8.75 per cent per annum, with yields going much higher. This was not the case six months ago.
For example, the Bajaj Finance FDs offer an interest rate of 8.50 per cent and is AAA rated. Similarly, Mahindra Finance FDs, again AAA rated offer an interest rate of 8.75 per cent per annum. At least the protection of your capital is ensured and you have guaranteed returns here.
2) Markets are overvalued, though not all pockets
The Sensex trailing p/e is near 23.53 times. Even if you assume that earnings would grow 10 per cent from here in 2018-19, the p/e would still be above the historical average of 17 times. Even the midcap and small cap index p/e is over the historical average.
This means the risk reward ratio is not too favourable and there could be significant losses in case of a sudden downturn.
3) Increased volatility ahead of elections
State elections will kick-off in the next few months, followed by the national elections. Predicting election outcomes in a diverse country like India is never very easy.
State elections to Rajasthan and Madhya Pradesh would remain crucial to figure the national mood, ahead of the central government elections in 2019.
It is likely that markets would be increasingly volatile and hence investors would do well, to at least partially move money into high quality debt, especially where they have made money.
As mentioned earlier, when markets are high the risk-reward ratio is very low. At the moment, we see higher risks, with limited rewards.
4) Interest rates set to rise further
The Reserve Bank of India is likely to decide on interest rates in its policy meeting on Wednesday. In all probability we will see another interest rate hike.
This means interest rates on bank deposits and other debt instruments could further become lucrative. Of course, there is a tax liability applicable on bank deposits, but shares too have started attracting a tax from this Union Budget 2018.
5) Play into defensives
If you still want to buy into stocks, defensives is the way to go. As an example, you can buy a stock like Coal India, which at the current market price gives you a dividend yield of 7.5 per cent.
The chances of the stock falling lower are minimal given that it offers a superb dividend yield. NMDC and other pharma stocks are also good bets in a rising market. In any case, it maybe time to be a little more cautious than before.