If you are stuck in Chakravyuh of penny stocks, time to exit is now

The Robinhood investors entered the market, thanks to easy accessibility and cheaper entry options allowed by discount brokers, but have no proper exit plans to redeem their profits.

New Delhi: Equity markets have recouped the lost sheen, thanks to a spectacular rally from March lows. This has given bragging rights to the new-age Robinhood investors, who are boasting their initial success in the market.

But market veterans say these new-age investors are mostly behaving like the Abhimanyu, Arjuna's son, from the great epic Mahabharata, who knew how to enter the military formation called Chakravyuh, but had no idea how to exit it.

The Robinhood investors entered the market, thanks to easy accessibility and cheaper entry options allowed by discount brokers, but have no proper exit plans to redeem their profits.

Domestic equity benchmarks Sensex and Nifty have rallied up to 50 per cent from lows of March 24. BSE Midcap and Smallcap Indices have rallied up to 60 per cent during this period. Analysts and market watchers have since turned cautious on Dalal Street, anticipating a sharp correction ahead.

The benchmark indices showed a lot of weakness last week, though they managed to avoid a big crash as select largecap names held the fort. But analysts say it may not be possible for the indices to sustain at these levels for long, given the pain in the real economy.

This past fortnight, RBI Governor Shaktikanta Das pointed out that there has been a clear disconnect between the strong surge in stock prices and the state of the real economy, as surplus global liquidity was driving up asset prices across the world.

Many of the new-age Abhimanyus have punted on penny stocks or low quality, illiquid stocks and some of them may get trapped when the market loses steam.

Seasoned money managers say everyone knew it was the right time to enter the market post Covid correction. But they are clueless when to exit.

“This is a liquidity-driven rally. Its sustainability is doubtful. Markets can remain irrational more than you can remain solvent. Investors should stay invested only in quality names," said Nilesh Shah, Managing Director, Kotak AMC.

“In the short term, markets are like a weighing machine. The more weight you put in, prices will surge. On the other hand, in longer run markets are like voting machines. Strong fundamentals will prevail," he said.

Even stocks with 'zero equity value' such as Accel India, GTL Infrastructure, McLeod Russel, Suzlon Energy, Jaiprakash Associates and ADAG group stocks multiplied investors’ wealth in the recent rally.

Investing should be based on principles, where one sees value or growth or both. One should pull out when neither of them exits or valuations have surged to unexpected levels.

Nilesh Sharma, Head of Broking Operations at Samco Securities, says after this stellar rally, one should start booking profits in staggered manners. “Buy on rumours, sell on news," said Sharma. "It is a liquidity-driven rally and we are seeing a surge across asset classes, including equity and gold, across the globe,” he pointed out.

Analysts are recommendation a diversified portfolio. Investors should rejig their asset allocation according to their risk appetite. But trying to catch falling knives would lead to wealth destruction, they warn.

Amar Ambani, Senior President, YES Securities said, "Market is more qualified than you. It knows everything that you don't. So, allow your outperformers to do well for you and exit the loss makers."

He said the domestic equity market has not gone into the bubble territory yet. "There is consolidation and there might be some challenges ahead. But if you have bought strong names with sound fundamentals, stay put," Ambani said.

Merely selling and buying stocks is not enough in the market; one should be alert about the risks, say analysts. “People assume that minting money from market is a cakewalk. However, this is not true. Equity markets are not casinos, and there are no overnight jackpots to make you a millionaire," said Sharma of Samco Securities.

For those trapped in low quality names or penny stocks, the expert advice to exit at the first opportunity, else they won't get the time to exit.