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The stock market is falling – Time to invest?

The equity markets have corrected big time. From more than 21000, the BSE Sensex has crashed to around 13000 levels. The prices of many blue chip shares have gone down by more than 25%. Should you invest in stocks / mutual funds (MFs) now?



If you are a regular pink-paper (read: business news paper) reader, I am sure you know how badly the stock market has crashed.

For that matter, even if you are somewhat indifferent to the stock market, there is no way you would have escaped all the hype around the stock market activity these days.

After all, how can you miss all the high-pitched media coverage, with titles like “Investors lose Rs. 1000 Crores in a day”?

So, what exactly should be done in this kind of a scenario? Should you sell whatever you have and cut your losses, or this is a golden opportunity for investing?

Let’s explore!

What is the bad news?

  • The price of crude oil is at historic highs – it is around $140 per barrel
  • Inflation has remained high for a long period – it is around 11.5%
  • Interest rates are increasing
  • The government’s stability is at question


The current market situation

Any analysis has to start with the correct understanding of the current situation. Let’s use the BSE Sensex as the barometer (or as a representative) of the stock market as a whole.

At its peak, on 10th January 2008, the Sensex was at 21206.8. The Price to Earnings (PE) ratio of the Sensex was around 28.5 at that time. (This was also the highest PE in 8 years).

Today, the BSE Sensex is around 13000. The PE now works out to around 13.5.

(To know more about the price to earnings ratio, please read “What is Price to Earnings (PE) ratio?”)

What does all this mean?

Yes, the situation is not very pleasant. And that’s why the markets have fallen. In media-speak, “the bad news has been priced-in by the market”!

The question is, what about the future? Where will the market go from here? Is there a reason for it to fall further, or is it near a bottom?

Historically, the Indian markets have traded in the PE range of 12 to 18. There have been times when the markets have gone above or below this range – January 2008 was clearly one such instance – but the breaches of this range have been infrequent.

We can clearly say that the stocks were overvalued in January 2008 – a PE of 28.5 is far outside the range of 12 to 18.

(Please read “Interpreting Price to Earnings (PE) Ratio” to understand how PE ratio can help us understand a company’s valuation better).

But the current PE of 13.5 is very near the bottom of the range.

Remember – the bottom of the range is usually experienced at times of recessions, and we are as far away from a recession as it can get!

In fact, the advance tax paid by many companies has been a lot more than what they paid during the same period last year. This means that these companies have made far more profits than in the same period last year!

(Want to know what advance tax is, and what hidden information it contains? Please read “What do Advance Tax numbers convey?”)

Of course, since inflation, interest rates and crude oil prices are high, the growth rate of Indian companies would slow down. But the government and the Reserve Bank of India (RBI) are doing their best to correct the situation and to shield industries from these factors.

And all said and done, the growth rate of Indian companies would remain a lot more than the companies in most other parts of the world even if it slows down.


My Interpretation

All the negative factors have already had a toll on the share prices, and they have corrected considerably. That is, the negatives have been factored-in.

Most Indian companies continue to grow faster than the companies worldwide.

These two things mean that there is not much scope of a further downfall from here. Even if the stock markets correct further, the correction would only be marginal.

Time to Buy Stocks!

Many, in fact, most Indian blue-chip companies are available at very attractive prices today. They present a very compelling “value” – they are available at prices less then what they are worth.

It is a great time to start picking up these stocks.

Do your research, choose the stocks carefully, and start buying them in stages!


Invest in Mutual Funds (MFs)

If you are not comfortable investing in stocks directly, start investing in top ranking equity diversified mutual funds.

(Confused whether to invest in equities directly or through MFs? Please read “Direct investment in Stocks versus Mutual Funds”)

The best way to invest in an MF would be through a systematic investment plan (SIP) – that way, you don’t need a large amount for investment, and at the same time, you can average your cost over time.

(There are many benefits of investing using SIPs. Please read “Systematic Investment Plan (SIP) – A rupee a day, keeps worries away” and “More on Systematic Investment Plan (SIP) and Micro SIP” to know more).

Don’t stop your SIPs

If you already have a systematic investment plan running, the biggest mistake that you can make is stopping it!

That’s right. The very purpose of an SIP is to average your cost of acquisition over time. If you buy MF units today, you would buy them really cheap, which would reduce your overall cost of acquisition by a large extent.

Moreover, all the negatives have been factored in during the fall from 21000 to 13000. If you stop the SIP now, you would give up all the positives that lie ahead in the future.

So, stick with the SIP – it might feel difficult, but it is in your best interest.

Conclusion

Start investing today!

In the long run, the money invested today would reap you very, very rich dividends.

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