To Rush or To Wait

Nobody wants to be under-invested in equity right now. The visibility on the political front changed the market view of many market participants, of both experienced and new entrant genres. The fear is that liquidity will make it even more difficult to invest in the market, and waiting for a correction may not even give the desired results. But, the flip side to this anxiety clearly exists.

Investors in a hurry may well end up investing in a market characterised by rising momentum, stretched valuations, and higher impact costs. This risk is the biggest risk that investors are facing in Indian equity right now. But, a significant section of the Indian market now believes that getting caught out of a further rally in equities must be averted at all costs. They rather invest now and take it as it comes. This is causing waves of FOMO from different sections of investors, large and small alike.

Everybody is quickly deciding where to put their money and going all in. This behaviour itself is creating higher impact costs and further increasing entry valuations. The impact costs are significantly higher in smallcaps and midcaps while largecaps are still within manageable levels. Sectoral rotation is also quickly filling valuation gaps in large caps, and stocks that looked relatively attractive a few weeks back are slowly losing their attractiveness.

In the smallcap and midcap space, the impact costs are still ruling high adding to the risk of elevated valuations. Conventional wisdom should stop an investor from blindly investing in these spaces. The entry valuation is extremely critical to make profits in these spaces and loss avoidance is also a function of buying behaviour. Throwing money into these spaces at elevated valuations is fraught with risks. Investors only know this too well. Yet, the fear of missing out is stopping investors from acting rationally even when they know what is the right thing to do.

This phase is set to extend for some length of time. The intervening period will be a test of the investment discipline of investors, large and small. Doing the right thing now is very critical for the long-term performance of equity portfolios. More importantly, avoiding mistakes matters the most right now.