The Hindu Business Line : To book profits or to continue?

"... the willingness - nay eagerness - of investors to favour complexity over simplicity and action over inaction, continuing to believe against all odds that they can beat the market... "

John Bogle, well-known champion of index funds

Every new peak spawns its own set of cynics. This time, too, it has not been an exception. With the index crossing 14,200 points, their number is larger, their pitch stronger and their incredulity at never-before levels. Are the bulls beginning to tire? Are stocks - more fairly valued than ever - all set to come off their highs? Is this the time to call it quits? These questions, and others that are equally ominous, are being asked loudly by all and sundry.

Fund managers' too are not above this. However, for many of them, the Indian story is still largely untarnished. But some, including a section that is increasingly turning vocal on this, are evidently becoming cautious, urging investors to be extra careful before committing anything serious. Buy when prices have dipped and try to stay invested for 3-5 years, is what most investment professionals are advising.

Equity funds performance

Given a background as compelling as this, it would be interesting to see how equity funds perform this year. Not even the most ardent believer would say that the broad markets would turn in a superlative performance year after year. For all you know, a good part of 2008 may go through a reversal of sorts, as some sections have started saying. In such a situation, there is no point in assuming that the gains recorded in the past year will be replicated this year too.

But let us not speculate idly. Instead, let us listen to some of the voices that can be heard above the din that is coming our way from the markets. These voices tell us that the direction of the markets may well be determined by a few strong themes. And those are what investors should pay heed to.

These themes (captured in fund managers' statements, fact-sheets and the like) include: the state of the world oil economy, the evolving interest rate scenario, spending on infrastructure by the government, involvement of FIIs in the Indian stock market, sustenance of corporate profitability... there are a few other broad ones as well.

Some specialists also wish to talk more specifically about risks than their peers. Take, for instance, Sundaram MF, which has referred to `risks on the radar' - a spike in inflation and capacity constraints. This will be evident as companies across a number of sectors are operating at close to peak capacity levels. Inflation, it further adds, is likely to be `the biggest source of uncertainty'. Inflation on the agri-commodity front may put pressure RBI to adopt a more pronounced hawkish stance, it is felt.

With the market reaching newer highs, these factors will have to be monitored by the investment fraternity even more actively. Investors should also watch out for cautionary signals, which may well come oftener from well-known, acclaimed sources. And every time the index goes up substantially, fund managers should expect more searching questions from their clients.

At the end of it, however, investors need to appreciate a simple fact: lack of action is not always the most appropriate solution. You may have paused when the market had reached 13,000 points and actually held back your investments with the hope that it will go down to 11K. That did not happen and before you know it, here are you looking at 14,000 points. The fault is all yours - there is no one else to blame.

Feedback may be sent to nilanjan@thehindu.co.in

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