The broad-based indices are trading at record high levels, as on July 16, 2021. Nifty was up by around 50 per cent as of the last one year. We witnessed a massive feat when the Indian equity markets touched the record $3 trillion mark on the 21^st of May 2021, making us the 8^th country to join the stock market capitalisation of more than $3 trillion club alongside US, China, Japan, Honk Kong, UK, Canada and France.

On the global front, we see signs of growth acceleration. The performances of most major countries have been encouraging during the quarter ending March 2021. In India too, we have seen improvement of growth, the World Bank in its latest report has pegged India’s GDP growth at 8.3 per cent, post taking into consideration the second Covid wave.

Along with the acceleration of growth, we have witnessed inflation harden in most countries, including India. With accommodative liquidity, low interest rate, relatively low return in most other asset classes, growth recovery, and impressive corporate performance, strong run in the equity markets continue across the world. In terms of year over year equity return, India continues to be one of the best markets.

Despite the strong rally in the Indian equity market since April 2020, because of major improvement in corporate profit the price to earnings valuation multiple for Indian equity market does not look too high.

I believe that the current investment outlook should be strategic as opposed to product-driven. One should assess the investment objective and risk associated with the investment vehicle. There has never been such a thing as the ‘right’ time to invest. While investing, it is the tenor or the duration of the invested portfolio that counts, as opposed to the timing of the markets. Psychologically, there is this gravitational pull around the markets, where people tend to sell when the markets are really low and then wait for the right time to invest back in, by which time the markets tend to bounce back and they miss the rally.

The most important factor while investing is sticking to your long-term strategy. Looking at historical data, the markets fell by ~-38.4 per cent, from its record high last year during the start of the Covid pandemic, now assuming if you had invested even at the peak, the time when the markets were at the highest point, you still would be at ~27.38 per centabsolute returns! This is what I mean by not the timing but the duration of investments.

As observed in the above table, there are 6 instances where markets fell significantly, and the average of all those falls was -48.7 per cent. However, it is important to note that after three years from the fall, the markets recovered better than the previous peak, and the average recovery has been 148.3 per cent.

At a given point of time, the markets would either be up or down, but a good diversified asset allocation strategy not only helps to create an alpha during positive market movement but also provides a cushion so that your portfolio doesn’t fall as much as the markets during a volatile period.

A study conducted in 1986 by Brinson, Hood and Singer on the US pension fund, substantiated that more than 91.5 per cent of the variability of a portfolio performance is attributed to asset allocation. Asset allocation is nothing but defining which asset classes to invest in order to reach your return objective at the same time manage your risk. A good strategy ensures that there isn’t too much deviation from the expected outcome.

Asset classes are broadly divided into equity, debt, commodity and real estate; then they are further broken down to stocks, mutual funds, bonds, gold, and the like. Different types of assets carry different levels of risk and potential for return, they typically don't respond to market forces in the same way at the same time. For instance, investing in stocks directly is considered highly risky as opposed to equity mutual funds. FD’s or debt mutual funds are usually considered as low risk assets due to low volatility perceived in them. Thus, we need to work on a top-down approach. Define a strong asset allocation, between equity, debt and commodity and then go about selecting the sub categories within them.

An asset allocation strategy with a well-diversified portfolio is the key to managing risk and ensuring low deviation from the expected outcome. Everyone’s risk taking capabilities differ and there are various ways to measure your risk tolerance. Investors must understand the overall risk associated with the asset allocation strategy.

When we are investing for the long term, short term volatility will always prevail but at the end of the day the fundamentals matter.

I would suggest that one invest as per their investment objective and stick to the asset allocation strategy. Don’t get flustered with short term volatility, define a well thought out plan and rebalance the portfolio as the necessity arises, but do not digress from the original strategy.

The author is Head – Corporate Strategy, Anand Rathi Shares and Stock Brokers.

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.