"The rally was broad-based in the initial phase but it is now getting segmented." ANUP MAHESHWARI, FUND MANAGER, DSP MERRILL LYNCH "Retail investors get lured into buying cheap stocks which are not leaders in their sectors." PRITHVI HALDEA, MANAGING DIRECTOR, PRIME DATABASE

By now, setting new records is a routine affair on the stock markets. Yet, celebrations were in order when the Bombay Stock Exchange's 30-share Sensex first crossed the 9000 mark on November 28 and closed at 8788 on November 30. Beyond the numbers though, a new story is unfolding. Sure, the stockmarket is still a money-making machine, but not of the kind it had been when the Sensex was journeying from 5000 to 8000. Till then it was more like a rising tide of FII inflows and other investments that lifted all stocks. For investors, it mattered little what kind of stocks they invested in. For most of them made good money.

Till the middle of this year, whenever doomsayers raised doubts about the fate of the bull run, the repartee of analysts and punters was that the rally was broad-based. Making money in the markets became a no-brainer as almost every stock was rising, including penny stocks. But "the random nature of the market has come to an end," says R. Sreesankar, head of research, IL&FS Investsmart.

The nature of the rally changed after the Sensex scaled 7500 points in August. Till then the share prices of the companies with medium or small market capitalisation (market capitalisation of up to Rs 100 crore and Rs 3,000 crore) were rising in tandem with the share prices of large companies (e.g. the 30 Sensex stocks). But since September, mid-caps and small-caps have lost steam. In its journey from 8000 points in September to 9000 points in November, the Sensex gained 12.5 per cent, while the BSE small-cap index fell by over 7 per cent from 6095.82 points to 5646.67 points (see charts: Four Faces of The Bull Run). The story of the midcaps is only slightly better with gains of only 1 per cent in the past three months. The primary reasons are slow growth in profits, apart from stretched valuations. Explains Anup Maheshwari, fund manager, DSP Merrill Lynch Fund Managers: "In the initial phase of this market, the rally was broad-based but it is now getting segmented. What you hold will become ever so important."

PICTURE SPEAK

NEW HEIGHTS: The Sensex hit an all-time high in November

So is it time for the small investor to withdraw? Not if they are prudent enough to stick to quality stocks, say analysts and fund managers. Nothing has changed for the worse about the Indian economy between now and a few months ago. With GDP growth being over 8 per cent in the first half of 2005-6, the year will end on a better growth rate than 2004-5. The key drivers of sentiments and prices on the stock market today are liquidity (inflow of funds) and still strong corporate earnings. FIIs bought shares worth $780 million (Rs 3,510 crore) in November, taking the total investment to over $8 billion in 2005. Analysts expect FII interest in Indian markets to continue, even though they pulled out more than $800 million in October. What's likely to keep investors in the market is a strong order book position of Indian companies which point to good future earnings. Says Jay Prakash Sinha, head of research at Kotak Securities: "In this market it's relatively easy to predict asset growth. Companies where there's a clear visibility of future earnings like auto-components, engineering, capital goods, banking and it will do well."

Infrastructure presents another good investment opportunity. Infrastructure spending by both the public and private sectors is on the rise and most construction companies have witnessed a massive increase in the number of projects on hand. Since December 2004, IVRCL Infrastructure & Projects has witnessed an 81 per cent jump in its order books. The figures for Nagarjuna and Hindustan Constructions are 91 per cent and 86 per cent for the same period. L&T is also witnessing an increased momentum in business. No wonder, the capital goods index has been the most consistent performer during the Sensex's journey from 5000 to 9000 (see charts: The Sectoral Spread). Future trends in policies can also change the fortunes of some stocks. If the Government's resolve to push consolidation and restructuring in public-sector banking begins to take shape, expect values of bank shares to rise.

Prithvi Haldea, managing director of Prime Database, has a strong word of caution: "Typically retail investors get lured into buying cheap stocks which are not leaders in their segment." It makes sense to go with the better judgement of an experienced fund manager as he has the knowledge of the industry, sector and peers. While the primary market is still a viable option for retail investors who wish to create wealth by trading in equity shares, gains will now accrue on a sustainable basis only by adopting a disciplined approach to investing. Says Maheshwari: "What you invest in is as important as how you invest." Most often small investors attempt to time the market by hoping to be able to sell when the price of a share has peaked or buying when it has hit the bottom. But knowing when to buy or sell so accurately is virtually impossible.

Whether the market is at a high or a low, the small investor's best bet is to invest through mutual funds in periodic instalments. With mutual funds having raised more than Rs 5,000 crore since September, this evergreen message seems to be getting across to more and more investors.