Is it the right time to increase equity allocation? Why?

This is the right time for investors to increase equity allocation as Indian markets have gone through a reasonable time and price correction.

The factors which have led to this correction are unlikely to remain a problem for too long. FII selling is likely to abate in months to come. The Russia-Ukraine crisis should not continue for too long now and if the tensions end, oil prices can cool down as well.

High inflation and interest rate hikes are unlikely to affect the profitability of Nifty50 companies. 

A third of the Nifty50 profit comes from banks, which are set to benefit from higher interest rates (as their margins would improve). The case is similar for commodity-linked businesses like oil, coal and metal (as inflation and higher-commodity prices go hand-in-hand). Another major Nifty constituent IT will also benefit due to currency depreciation (as high oil prices will lead to pressure on balance of payment).

Bank and power sectors fairly priced

Valuations are no longer a concern as the market has gone through significant correction. However, not all sectors are fairly valued like capital and consumer goods, which continue to trade at a premium.

Banks, which have seen most FII selling, are reasonably valued given the improvement in their balance sheets and growth outlook. Power sector is also trading below the fair P/E multiple.

Where to invest?

Preference should be a diversified portfolio of Large, Mid and small cap funds, although large caps are slightly more attractive right now given that the economy is still facing multiple risks and FII selling has improved their P/E multiple.

How to invest?

It is advisable to put money into equity funds in a phased manner in the next few months to take advantage of sharp dips. But make sure that the money you put in can remain invested for the long term (at least 3 years +).

When will the market bounce back?

The markets always bounce back sharply after a great fall. History is evidence that whatever the reason may be, the markets find a reason to jump back, although the level from which it will bounce or the time from when it does is something no one can assure (It could be lower and take a few months as well). But you can be rest assured that market valuations are not a concern anymore and if your investment horizon is long (3+ years), then you must take advantage of the correction.

Remember: Corrections are temporary but growth is permanent.