In less than a month, the current year will come to an end. Undoubtedly, this has been one of the most volatile years in the history of the domestic stock markets. The year created quite a few milestones with the Sensex touching a new high of 20,000 and the year also saw the Sensex swing in a wild range of nearly 1,000 points.
As we get closer to the end of the year, it is interesting to roll the clock back to early this year and review the Sensex journey over the period. Needless to say, not many dared to bet the Sensex would touch a level of 20,000 in 2007 though a target of 20,000 and 30,000 were projected over the medium term. Interestingly, during every deep correction, these targets came down drastically and many were willing to put the Sensex target at 11,000-15,000 for the year 2007. You can't blame the analysts and brokerage houses because this has been one of the most volatile years and more importantly, the picture has often got bleak on the global front.
For instance, high crude prices are here to stay and even after a quarter, the dollar has failed to regain its old base of Rs 40. Even during the last few days, the market has surprisingly staged a smart recovery and has managed to stay above 19,000 level but the undercurrent is not too very promising. In fact, the volatility has helped day traders with some of the stocks posting 5-10 percent gains in a matter of a few days.
Obviously, the volatility does not make an investor's life easy. The short-term profits tend to induce more into the short-term trading but investors should realise that day trading has never been a multi bagger over the long term. The gains in the short term are never sustainable in the long term. Instead, investors can take a more long-term approach as this has proved to be a better strategy.
While choosing the stocks, a bias towards mid-cap may not be a bad idea for the coming year. While they are volatile and risk-reward ratio is higher when compared with large caps, the returns have proved to be much higher in the last couple of months.
Betting on large-cap stocks, instead, could prove a safer strategy as the institutional money too tends to chase large-cap stocks. Another comforting news for the investor is that in the next few months, the mutual fund industry has lined up new fund offers (NFO) with different themes. While some big funds have announced their infrastructure-oriented funds, a number of mid-sized funds have announced their NFOs. While this will squeeze the liquidity in the short term, the market will have a fund flow in the region of Rs 10,000-20,000 crores early next year.
As we get closer to the end of the year, it is interesting to roll the clock back to early this year and review the Sensex journey over the period. Needless to say, not many dared to bet the Sensex would touch a level of 20,000 in 2007 though a target of 20,000 and 30,000 were projected over the medium term. Interestingly, during every deep correction, these targets came down drastically and many were willing to put the Sensex target at 11,000-15,000 for the year 2007. You can't blame the analysts and brokerage houses because this has been one of the most volatile years and more importantly, the picture has often got bleak on the global front.
For instance, high crude prices are here to stay and even after a quarter, the dollar has failed to regain its old base of Rs 40. Even during the last few days, the market has surprisingly staged a smart recovery and has managed to stay above 19,000 level but the undercurrent is not too very promising. In fact, the volatility has helped day traders with some of the stocks posting 5-10 percent gains in a matter of a few days.
Obviously, the volatility does not make an investor's life easy. The short-term profits tend to induce more into the short-term trading but investors should realise that day trading has never been a multi bagger over the long term. The gains in the short term are never sustainable in the long term. Instead, investors can take a more long-term approach as this has proved to be a better strategy.
While choosing the stocks, a bias towards mid-cap may not be a bad idea for the coming year. While they are volatile and risk-reward ratio is higher when compared with large caps, the returns have proved to be much higher in the last couple of months.
Betting on large-cap stocks, instead, could prove a safer strategy as the institutional money too tends to chase large-cap stocks. Another comforting news for the investor is that in the next few months, the mutual fund industry has lined up new fund offers (NFO) with different themes. While some big funds have announced their infrastructure-oriented funds, a number of mid-sized funds have announced their NFOs. While this will squeeze the liquidity in the short term, the market will have a fund flow in the region of Rs 10,000-20,000 crores early next year.
Besides market volatility, investors also have to keep in mind the risks associated with sectors. In fact, mutual funds would be a better option for passive investors as no stock or sector is fancied for too long these days. Not many would have bet on retail or construction sectors three years ago and the much-fancied FMCG sector has fallen out of market favour in recent months. If you look at the Sensex composition, at least half-a-dozen companies did not figure in the list, five years ago.
Hence, it is important for direct equity investors to keep track of the changing market scenario if they are focused on building wealth through stock picking. The safer strategy could be to identify the stock for the portfolio and follow accumulation strategy during every dip. Though this could prove challenging, the risk-reward ratio makes the effort meaningful.
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