Nifty At 20,000: What Should Be Your Investment Strategy For Equity Mutual Funds?

As an equity investor, it is undoubtedly exhilarating to witness the stock market reaching unprecedented heights. This remarkable ascent serves as a testament to the robust underpinnings of India's growth narrative. However, it also causes a sense of anxiety among some, prompting questions about the possibility of an imminent market correction. Now, at this juncture, it is imperative to remind ourselves as long-term investors, that over the course of decades, equity markets are bound to scale all-time highs repeatedly.
For a long-term equity investor, the occurrence of an all-time high in the market need not induce anxiety.

Rather, it should be regarded as an affirmation of the enduring growth fundamentals. If an investor's horizon extends beyond 3-4 years, there is a compelling reason to persistently channel funds into the equity markets. Ceasing regular investments and waiting for a market correction to happen lacks a sound rationale. A case in point is the substantial correction witnessed in the NIFTY during April 2020, when it dipped to 7500 levels. Subsequently, the recovery was robust, propelling the NIFTY to 15000 initially and then 18000 levels by October 2021. Many investors who opted to sit on the sidelines during this resurgence have been waiting for a correction ever since, only to find that the NIFTY has now surpassed the 20,000 mark. This is a common pitfall encountered during market rallies. As mentioned earlier, for the long-term investor, such market highs are inconsequential, as they are merely waypoints within a secular bull run.

An examination of historical NIFTY data since its inception reveals that even if one had invested exclusively during all-time highs, the compounded annual growth rate (CAGR) would still stand at a commendable 11.24% p.a. This represents a respectable rate of compounding for long-term investments. In the improbable scenario where an individual managed to invest at all-time lows every time, their returns would approximate 14.91%. Most investors typically fall within this range when they maintain a regular investment routine over time, with their long-term returns converging around 12-13% p.a.

For long-term investors who harbor concerns about potential market corrections, there exists a slightly sophisticated strategy: hedging through NIFTY Put Options. As an example, the NIFTY 20000 Strike Price Put Option for December 2024 expiry is currently available at approximately Rs. 670. By allocating around 3.3% of their portfolio, investors can safeguard against NIFTY's downside risk below the 20,000 threshold till the end of next year, which also includes a Union Election. It is important to note that this strategy is intricate, particularly for retail investors unfamiliar with derivatives. Therefore, we strongly recommend seeking guidance from a Registered Investment Adviser (RIA) like ours before implementing a hedging strategy.

The only scenario in which investors should consider booking profits at all-time high levels is when they require funds in the next couple of years. In such instances, investors can prudently work towards their financial goals by systematically realizing gains at regular intervals. Additionally, they may opt to employ a trailing stop-loss mechanism, perhaps pegged to a specific NIFTY level like 19500, to lock in profits for their short-term objectives.

In conclusion, navigating market highs demands a strategic perspective and a steadfast commitment to long-term investment principles. While volatility and corrections are an inherent part of the market, they should not deter investors from participating in India's growth story.

The views and opinions stated in the content belong to Mr. Harish Menon, Co-founder and head of Investments and product research at House of Alpha.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.