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Be cautious while investing now..
Wed, 25 Jun Pre-Open

As bullish sentiments rule Indian stock markets, it is difficult not to get caught in the euphoria. As Warren Buffett has rightly said - "Only when the tide goes out do you discover who's been swimming naked." In these times, a lot of stocks, irrespective of the fundamentals or balance sheet, seem to be riding the bull wave. Be it debt ridden companies or companies waiting to hit markets for the first time through IPOs, everyone wants to make the most of the rally. Lot of themes are becoming popular these days- infrastructure theme, disinvestment theme and debt reduction theme to mention a few.

However, these are the times when one needs to be even more cautious as far as stock investing is concerned. Especially in the case of small cap companies and companies in the capital goods, realty, infrastructure and power segment.

While expectations of reforms are high, investors must note that broad macro economic scenario will not change overnight. It may take a few years before any material impact on the respective businesses can be seen.

Infact, if new structural changes and regulatory reforms do happen as expected, the growth momentum may slow down a bit. This is because reform in one sector could have an adverse impact on the prospects of another in the short term and it may take some time before efforts start paying. For example, a rise in gas prices is likely to increase the cost for gas based power plants and fertilizer companies. Similarly, as Government proposes to hike rail freight, it may lead to an inflationary environment in the short to medium term, thus impacting growth momentum. As such, investors would do well not to jump on the bandwagon and give due importance to fundamentals and management quality. Also, investing at right valuations is equally important. In short, stick to bottom up stock picking approach and stay disciplined.

What approach should investors take for investing in stock markets in current times? Let us know in the Equitymaster Club.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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