Sensex at 80,000: Why mutual fund investors need to tone down expectations

The scaling of the historic 80,000 level by Sensex is perhaps a reminder for mutual fund investors betting on the power of equities that it is time to tone down expectations from Dalal Street in the near term even as the longer term outlook remains bullish.

Experts suggest mutual fund investors should continue with SIP investments but reduce allocation to equity given the elevated valuations that come in raging bull markets.

"We believe investors should be between 10-20% lower than the strategic asset allocation in equities due to the premium valuations currently,” said Vishal Dhawan, CEO, Plan Ahead Wealth Advisors, a wealth management firm in Mumbai.

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Sensex reached an all time high level of 80,000 on Wednesday. In the last one year, BSE Sensex - TRI has gone up by around 24.25%. In the last three and five years, the index offered returns of around 16.50% and 16.35% respectively.

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With Sensex reaching a new milestone, mutual fund investors are concerned about the ideal allocation they should have at the current point of time?

“Given the current market conditions, investors should focus on diversification to balance potential risks and returns. The ideal asset allocation depends on the investor's risk profile and time horizon, but a well-diversified allocation across asset classes is advisable to manage the risk-return trade-off. Those with a near-term time horizon should ideally stay away from equities and start switching their money from equity to debt,” recommends Sagar Shinde, VP Research, Fisdom.

Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance, says asset allocation would depend on the risk appetite and long-term horizon goals. “There is no standard answer for ideal asset allocation. It could be high in equity for those with higher risk appetite and long-term horizon goals, or it is more skewed towards debt for those with lower risk appetite or near-term goals,” he said.

According to an earlier report by ET, the majority of the Sensex constituents now trade above their respective long-term average valuations. This means investors need to be selective while accumulating blue chip stocks. The current trailing Sensex P/E of 24.3 is among the lowest compared with the P/E levels when the index was at 50k, 55k, 60k, 70k, and 75k. At 65k, the Sensex P/E was a tad lower at 24.2. The highest P/E was 34.4 when the Sensex touched 50k in January 2021. It came down to 31.3 by the time the Sensex crossed 60k in September 2021 reflecting a pickup in the corporate earnings.

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After looking at the current valuations, some mutual fund investors are concerned whether they should postpone their investments or continue investing.

“An investor should never postpone their investments based on market trends. It is only the large-cap index funds that would track the index - Nifty or Sensex and are a true reflection of the market. Other category funds like mid-cap, small-cap or flexi caps are actively managed and investments may not reflect the market trend. Broad-based large-cap funds (determined as the market), could be going up, but the other stocks could be in the downward trend, or vice-versa. So, as long as we are broadly diversified, we should continue investing based on our goals,” recommends Minocha.

“Those who wish to start fresh should not postpone their investments. Instead, they can stagger their entries using Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs), allowing gradual market entry and reducing the risk of investing at a market peak. If a steep market correction occurs, investors can capitalize on lower valuations by increasing their equity exposure. Overall, a balanced and diversified portfolio, combined with a disciplined investment approach, can help navigate the current market uncertainties effectively,” recommends Shinde.

According to Adhil Shetty, CEO of Bankbazaar.com, only major shocks can cause negative returns over a three year period but the market typically bounces back and recovers after such downturns.

“The best way to invest without rushing into decisions is to keep doing SIPs. Over the long run, markets generally trend upwards, showing positive returns over 5 to 10 years. Only major shocks like the 2008 financial crisis or the COVID-19 pandemic can cause negative returns over a 3-year period, but the market typically bounces back and recovers after such downturns. Therefore, continuing with a systematic investment plan is advisable for existing investors. Those entering the market now can start and gradually increase their investments based on their income and future financial goals,” he said.

In 2024 so far, the participation from the retail investors has grown which is evident from the SIP contribution received. In January the SIP contribution was Rs 18,838 crore which has now reached Rs 20,904 crore in May (last available data).Investors have continued to make investments through SIP.

Going forward, what strategy should mutual fund investors follow? Mutual fund advisors recommend that investors should continue with their investments.

“Investors should continue to invest based on their goals, risk appetite and time horizon. They should not get influenced by any hype - positive or negative. They should not get influenced by the recent huge returns in equities and start investing in riskier asset classes ignoring their own risk profile, or stop investing and wait for the markets to fall as this could be considered an all-time high. Index is after all just a number which started at 100 in 1978-79 and has reached 80,000, delivering a CAGR of over 15%. Lump sums in the equities need to be avoided and investments should be made through SIPs or STPs,” suggests Minocha.

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“Considering valuations are currently significantly above long term averages, investors should invest through a SIP or STP strategy with a 7-10 year investment horizon if they wish to invest in equity funds. They could consider lumpsums in dynamic asset allocation funds/ balanced advantage funds,” said Dhawan.

Investors are suggested to review and rebalance their portfolios to ensure that the investment strategy is aligned with the financial goals.

“Given the recent all-time high of the Sensex, mutual fund investors should first revisit their portfolio and rebalance if the current asset allocation is deviating from the target asset allocation. Regular portfolio reviews and rebalancing ensure that the investment strategy aligns with financial goals and risk tolerance, maintaining the desired asset allocation mix and potentially enhancing returns while managing risk,” advises Shinde.

He added, “Furthermore, investors should consider a prudent approach to new investments. Market peaks can pose risks for fresh lump-sum investments if a short-term correction occurs. Therefore, opting for a Systematic Investment Plan (SIP) might be more prudent as it allows for regular investments over time, averaging out the purchase cost and mitigating the impact of market volatility.”

“For those considering lump-sum investments, a Systematic Transfer Plan (STP) over six to twelve months can be a strategic alternative. This approach gradually transfers the lump sum into the target mutual fund, reducing timing risks. If there is a steep market correction, investors can consider directly taking advantage of lower prices,” he further advised.