By DK Aggarwal

With so much uncertainty about India’s macroeconomic outlook, it is important to make sure your equity allocation is positioned to do well no matter what happens to the economy.

Over the years, domestic institutional investors have come to acquire substantial clout in the equity market, which once used to rest with the foreign institutional investors (FIIs). Earlier every time foreign institutional investors resort to a selloff, the market would tank.

Growing awareness and lack of opportunities elsewhere have now driven investors to move money in an organised and staggered manner into the financial markets through instruments like systematic investing plan (SIP), and that volume has become sizeable at about Rs 8000 crore a month i.e. providing enough liquidity and strength to the equity market.

This is the primary cause of the diversion that the market has been showing against weak macroeconomic fundamentals. Equity returns have, in many cases, leapt ahead of economic fundamentals, making future returns dependent on earnings growth.

Actually, a diversified portfolio can reduce risks to a large extent by reducing concentration in one specific area of investment. A fall in one stock will likely be balanced out by an rise in another stock, thereby helping minimise losses and providing a more stable return overall.

It also allows investors to better identify and map a slowdown in a particular stock and then move to adjust the portfolio to give a larger weightage to stocks that might be performing better. Another the most important rule of investing is managing the close relationship between risk and return. Without risk, there can be no returns. Hence, one should invest up to an certain extent which one is ready to risk.

Besides, another main thing to keep in mind while investing is to ensure a long-term investment horizon. Having good insights on equities is essential; quality stocks are the backbone of a defensive equity strategy. Investing in quality stocks offers a degree of stability and resilience to macroeconomic swings.

Once you have invested in a stock, that’s not the end of it; at every stage, one has to review it. The concept of knowing when to sell a stock is as important as buying the right stock at the right time. One should always invest and book profit in a staggered manner. If you don’t have the expertise, take help of a Sebi-registered investment adviser and this will help you to know which stock to get rid of immediately and which ones to hold in the kitty.

As we all know, markets are often irrational. And Indian market is showing enough proof of it. Benchmark indices on Dalal Street recently hit their peak levels when economic growth hit a multi-year low, led by a crash in consumption. And it is not surprising that the performance of the market benchmarks is far away from the economic reality.

The only way investors can safeguard their equity investment against such aberrations is by sticking to the basic principles mentioned above.


Chairman and MD, SMC Investments and Advisors

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