Indian Stock Markets have had a spectacular rally in the last few weeks, with the index not even falling after hitting a peak. From 28,000 points on the Sensex a few months ago, we are now comfortably above the 31,000 points. Here are a few ideas that you may consider to avoid dramatic losses when buying at high or peak levels.
Look for fundamentally sound stocks with good dividends
Look for stocks that continue to yield good dividends and the business risk is not too high. Let us give an example. A stock like HPCL with a dividend yield of over 6 per cent is a solid stock to own. With crude oil unlikely to fall in the near future, the stock is available at a p/e of just 8 times. Similarly, some other stocks like Chennai Refineries. Some suggest buying into pharma stocks which have got a lot cheaper. Here the problems are the nature of business brings about great risk, particularly on US FDA bans. Buying into domestic growth stories could also help.
Stick to SIPs of mutual funds
Investors suggest sticking to the SIP theme as these could provide a hedge against falling prices. For example, if you start a SIP of say SBI Blue Chip Fund at an NAV of Rs 20 and next month stock prices fall you can buy at Rs 19.80, and so on and so forth. This allows you a perfect hedge in a rising market or a falling market. Most of the equity dedicated mutual fund units have done well and given decent returns in the long term, provided you have stuck to your investment strategy.
Move money to balanced funds from equity funds
If you have made money from equity funds, it may also be a good time to partially encash the profits. In fact, you could move money to balanced funds, which would provide at least some hedge against a sharp fall in equity prices. Balanced funds are funds that invest in debt as well as equity. Te advantage here is that you could move money swiftly from debt to equity in case there is a sudden and sharp fall in equity prices. On the other hand should equities rise you could move money back to debt. Increased volatility may provide good opportunities for a balanced fund investor.
Bottoms-up approach to investing
In a rising market, the one option that remains is the bottoms-up approach. In this case what does happen is that investors buy very near the 52-week lows or near the bottom. Now, if you look at select stocks like Coal India, which recently hit a 52-week low, the stock maybe a good bottoms-up approach to follow, given that the stock also gives a very good dividend yield. TV Today is another classic example where the stock has recently hit a new 52-week low. While there are possibilities that stocks from these categories go even lower, the downside risk maybe very limited in case of a dramatic decline in stock prices.