Even after consistent selling by FIIs, DIIs are supporting the market. What is leading to this?
It is a case of once bitten, twice shy. The last time domestic investors had stayed away last year when Sensex and the broader market rebounded rapidly. This time, they do not want to miss that. Domestic investors are sensing that the panic is slightly overdone. They know that the RBI, government and the FIIs will be supporting. Domestic investors are being smarter and there’s no panic reaction like what they did last year around this time.
As far as the investor behaviour is concerned, redemptions have come down sharply in the last months, inflows are gradually picking up and so your net new cash into the mutual fund industry has turned positive for a couple of months.
The third aspect is that the underlying strength of the economy has not been damaged in the medium-term by the second wave. There will be impacts in the short term, but the monsoon outlook is looking good. Once we start vaccinating a significant part of our population in the next 6 months, we will be singing a slightly different tune.
This (the current crisis) is a short term thing. It will pass and selloff by FIIs is a buying opportunity for domestic investors. The play is in economy sensitive stocks. That said, volatility will continue because FIIs have dominated. Even a small outflow from FIIs would lead to a lot of volatility in the market.
So what, according to you, a retail investor should do now?
I would suggest them to reduce their equity component because liquidity is going to be volatile for the next six months. I would suggest a 7o:30 equity-debt component. Do not go into long term debt. Park 30% in money funds, liquid funds or any short term funds. Within the remaining 70%, I would recommend going into the dynamic asset allocation or balance advantage category which brings in further debt. Effectively, then you are looking at a 50-50 ratio, but do not do a 50-50 yourself as a retail investor because there will be a time when you need to quickly add equity. The fund manager will be in a better position than a retail investor to quickly reallocate the portfolio. In debt, you get the advantage of long term capital gains only after three years, so do not overdo the debt part. Let fund managers play the debt card.
The third thing is to keep staggering your investment. SIPs are a better bet to play this market on the equity side than putting in a lump sum.
