Investors should exercise cautious optimism, says Saumya Sarkar of Wealth Redefine

Given the current market conditions marked by substantial rallies, opting for a top down investment approach may not be the most prudent choice, says Soumya Sarkar, Co Founder, . In an interview with , Sarkar said that disciplined asset allocation safeguards investments by promoting a well calibrated response to market dynamics.

New age investors are showing increased enthusiasm for aggressive equity investments, yet the key focus should always be on prudent asset allocation. This strategy is fundamental for navigating the unpredictable market, as sustained one sided trends are rare. Asset allocation offers a balanced approach tailored to an investor’s risk profile, ensuring they capitalise on market opportunities without succumbing to excessive risk.

During bullish periods, there’s a tendency to overemphasise equity due to past returns, neglecting the significance of diversified allocation. Conversely, in bearish markets, panic induced shifts from equity to debt occur, fuelled by perceptions of expensive or undervalued markets. Asset allocation acts as a stabilising force, prompting investors to adjust their portfolios based on market conditions rather than succumbing to market sentiments.

It’s an essential practice, especially considering diverse risk profiles, ensuring investors align their strategies with their risk tolerance. In essence, disciplined asset allocation safeguards investments by promoting a well calibrated response to market dynamics. Certainly, in the current market rally, there is a conspicuous surge, notably in some stocks that appear to be overvalued.

Fund managers are diligently highlighting these overvalued stocks, anticipating a potential sharp correction. Investors venturing into value or growth based investments should grasp the origins of a stock’s value, scrutinising factors such as the price to earnings ratio, price to book value, and the DMA.

These parameters offer insights into whether a stock is overvalued or undervalued. During a bullish market phase, the focus tends to shift towards growth stocks, as value stocks often become overpriced. Conversely, in bear markets, fund managers and investors tend to favour value stocks due to their comparatively lower prices.

Given the current bullish trend, the emphasis should lean towards growth stocks, considering the already inflated values of value stocks. With value stocks having yielded substantial returns, the prospect of growth or momentum stocks outperforming becomes an appealing option moving forward. Given the current market conditions marked by substantial rallies, opting for a top down investment approach may not be the most prudent choice.

Instead, a bottom up strategy seems more suitable for investors at this juncture. This approach allows investors to focus on individual foreign stocks that may still be undervalued or possess growth potential. Certain sectors, despite the overall market surge, continue to harbour undervalued assets that could yield favourable returns over the next one to 1.5 years.

Therefore, favouring a bottom up perspective over a top down one appears to be a more nuanced and advantageous approach in the current landscape. By scrutinising specific stocks and sectors, investors can potentially uncover opportunities that may not be evident when adopting a broader market overview.

In the global context, inflation is currently on a downward trend, but factors such as monsoons and geopolitical issues in the Middle East, Russia, and Europe could potentially lead to a reversal, causing inflation to rise again. Investors should exercise cautious optimism, considering the ongoing decrease in inflation, but being mindful of potential supply side challenges that might transform it into supply driven inflation rather than demand driven.

While there’s a chance inflation could rise, the may choose to maintain rates rather than increase them, impacting investor confidence. Investors should remain optimistically cautious about inflation and yield movements rather than adopting a pessimistic stance. The likelihood of a significant increase in inflation is low but not entirely dismissible; instead, inflation may persist for some time before gradually declining, prompting central banks to consider rate cuts.

Regarding crude oil, it appears to have stabilised within a range of $75 to $85, unless prolonged geopolitical tensions lead to a surge. Barring such scenarios, crude oil is expected to remain between $65 and $85 shortly. Gold and Silver ETFs serve well for asset allocation, but commitment levels vary based on individual investment goals.

There’s no fixed minimum or maximum allocation, as preferences hinge on one’s risk appetite. Safety focused investors are often inclined towards gold and debts, while those seeking an aggressive approach may opt for silver and equities. The degree of asset allocation in gold and silver remains subjective.

Individuals prioritising asset allocation should explore , along with gold and silver funds, as viable options for their investment strategy. Investors generally steer clear of due to their lack of a track record. The absence of historical data makes it challenging to assess a fund’s performance, including factors like alpha, beta, and its resilience in varying market conditions.

Evaluating how a fund has fared in both challenging and favourable times is crucial for informed decision making, and NFOs typically lack this critical information. While some investors may be enticed by the low unit cost of NFOs, such as 10 per unit, this should not be the sole determining factor. The nominal value per unit is irrelevant compared to the fund’s actual performance.

In instances where an existing fund with an NAV of 20 yields a 10% return, while an NFO delivers a 1% return, investors in the latter would incur losses. Therefore, the unit cost is merely a denominator and should not drive investment decisions. Exceptions may arise in the case of unique NFOs focused on emerging sectors like electric vehicles or artificial intelligence.

In such instances, investors might consider NFOs for their potential to tap into rare investment opportunities. However, the consensus favours established funds with a proven track record, allowing for a more reliable assessment of future expectations from fund managers and overall performance. Livemint tops charts as the fastest growing news website in the world to know more.

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