Now is the time for that smart money to move in

Timing the market is impossible, thus, it may be wise to start investing at current levels.

A quick question — How many of you are clients of banks and other brokers, which are now saying that the fair value of the Sensex is between 8,000 and 9,000? Now the important one — How many of you were told by these same banks / brokers not to invest earlier this year as the markets were 'over-valued'? 

We did a quick check and this is what we came up with — none of the investors we spoke to were told by their banks to adopt caution. Since our sample, of course, is very small compared with the number of clients the banks have, we leave it to you to take a final call on the relevance of our results. The pessimism that is setting in today is almost as surprising as the euphoria that had gripped the market earlier this year.

Earlier in the year, as market valuations stretched and reached unsustainable levels of 20x one year forward earnings (on an average stock prices were at 20 times one year forward earnings), we recommended that you, our clients, avoid going in for lumpsum investments in equity funds. Instead, we recommended you go in for systematic investment plans, and more importantly, stick to your overall asset allocation and avoid getting carried away by the market sentiment. Then we were faced with views that the markets are heading towards 15,000 points and not investing could be a mistake.

Indeed, even as the markets rallied in the last few weeks before the fall, a lot of clients felt investing in a lumpsum would have been a better option. 

Today, however, things have turned around almost completely. The markets are trading at about 13x one year forward earnings after having corrected by about 27% from their all-time highs. This, we believe, is a level which presents an attractive investment opportunity for investors. But, instead, when we are talking to clients, we are faced with a view that the markets will fall still further; to 8,000 points or even lower and it may be wise to 'hold' back.

We are not ruling out the possibility of the markets falling further before recovering. However, what we know is that timing the market to perfection is impossible and therefore it may be wise to start investing at current levels. In our earlier note, we had recommended that investors put in 15%- 20% of their monies; we think an additional 15% - 20% of the monies should be invested now. For those of you who are willing to take near term risk, even investing in a lumpsum is an option (for a 3 - 5 year investment horizon).

This may be a great time to block the noise and focus on the fundamentals. Remember, no one ever made extraordinary money doing what everyone else is doing!

— By arrangement with www. personalfn.com, the financial services initiative. It can be reached at 022-6799 1234.