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Fear, Uncertainty and Doubt

These are the emotions ruling the stock market now. With the market at such a peak, exhuberance has taken a back seat.

What do you think is the dominant emotion in the minds of Indian fund managers right now? With the markets at an all-time high (and how routine that phrase sounds nowadays) and their funds having given investors fantastic returns, you would expect the investment managers of Indian mutual funds to be in the highest possible spirits right now.
So why are they not going around with smiles on their lips and songs in their hearts? As far as I can see, the dominant emotions among fund managers are fear, uncertainty and doubt. Last week, I met a number of the leading fund managers of the country to get a sense of what they felt about the markets and the investment climate. While there were many differences between their views at the level of individual industries, I was struck by the common thread of apprehension about the direction that the markets are taking.

And this fear is amply reflected in the portfolios of most equity funds in the country. Uninvested cash is on the rise in almost every equity fund. In some of the best funds in the country, the cash component could be as high as 30 per cent. This is almost the level of cash at which a fund should actually be called a hybrid fund, not an equity one.
Why are cash levels so high? Because while investors have given fund managers the money to invest, but the managers can't find enough stocks that they think are investment-worthy at the current price levels.
Even in the stocks that funds are holding, many managers are configured in a heavily defensive position. I know that sounds like something out of football, but in investment management, a defensive position means investing in stocks which you think will fall relatively less if the markets start falling. What all this means is that if one goes by actions of fund managers, then the markets could be expected to start falling at any point now.

Could they be right? No one knows, and at this point no one can possibly know. If one looks back at past trends then many stocks' levels are definitely too high to be sustained. It is true that corporate profits are booming and there are many, many positives that were never there earlier. need for long time should be invested in stocks.

However, it is just as true that at the level of many individual companies and the market as a whole, people have started believing only the good news and are mentally ignoring the possible bad news. Effectively, this is now a market based heavily on sentiment (whether foreign or Indian) and such a market is inherently unpredictable. This could go on for months or even years. Or, something could happen this morning that will change the mood and end it all.
What should an investor do? It is important that investors should not leave any short-term money in the stock market. If you think you have some definite financial need to fulfill which will need cash over the next two to three years, you should gradually start offloading your shares now. Clearly, from this point onwards, only money that you definitely won't need for long time should be invested in stocks.
That, and any 'fun money' that you would otherwise have taken to Las Vegas or some place like that.