Bull Market: Go by fundamentals, invest with caution

26 Sep, 2010, 05.31AM IST,
Kavita Sriram,ET Bureau

Bull Market: Go by fundamentals, invest with caution

A bull run may be good news for investors. However, must exert extreme caution when attempting to churn out profits from these markets.

Factors that led to bull run

The shot past the 20,000 level for the first time since mid-January 2008. Both NSE and BSE regained highs after a gap of almost 32 months. Investor enthusiasm in oil and gas, capital goods and banking sector stocks led the ascent to glory.

The fast-expanding economy on track after stimulus packages built up the momentum. Most important of all was the sustained foreign institutional investor (FII) interest in the markets that gave the Sensex the final impetus. Inflow of foreign capital and strong economic growth forecasts are credited for the optimism in the markets.

Perils of

Anticipation of a large correction could create panic among investors who could resort to booking profits. This situation is more likely when the index rise has been rapid and unexpected. If the bull run is largely owing to foreign capital, the market's direction can be highly unpredictable. This is because foreign investor sentiments are impacted with global developments and trends.

So, a recession or political development elsewhere across the globe can lead to FII selling here. Some analysts could declare a bull run as sustainable and advise investors to enter the markets. There may be many who would advice caution citing a likely correction. These mixed signals could confuse an investor who would watch the bull phase pass, simply waiting by the sidelines.

Golden rules for investing in bull markets

Here are a few pointers for investors in a bull run:

Go by fundamentals

Identifying a possible bull run well ahead and entering at this early stage will give ample opportunity to book profits. However, pick up stocks that have strong fundamentals that wouldn't let you down in volatile times.

Stay within risk appetite

Invest according to your risk appetite. Small-cap stocks have tremendous growth potential. But they carry a high element of risk. On the contrary, largecap stocks are less risky with only little headroom to climb higher.

Balance portfolio

Ensure your overall portfolio is well-diversified and strike a balance between your debt and equity investments. Do not borrow to invest in the markets. Do not divert funds from your savings kitty to the equity market. Do not be deceived by a bubble that has artificially pushed the markets up. Investing systematically with a long-term perspective in mind is the best market strategy.

Stick to goals

Deter from buying or selling high volumes. Do not invest heavily in heated stocks when the index is at a peak. Avoid chasing the crowd. Stick to your investment goals. Some investors who make money in bull markets become over-confident and start taking greater risks. Rely more on market and company research rather than solely on instincts. Do not get carried away by rumours, peer activities and forecasts. Not many can actually chase market indices. 

http://economictimes.indiatimes.com/features/financial-times/Bull-Market-Go-by-fundamentals-invest-with-caution/articleshow/6626132.cms