Five things to remember while investing in mutual funds when markets are high

• Seems like investors have again entered a high market cycle with benchmark indices Nifty 50 and Sensex closing above their historic highs yesterday on August 3.
• The rally in stocks is spread across sectors as indicated by a surge in varied Nifty 50 stocks.
• When the market is high ensure your portfolio is diversified so that you benefit from rally in various segments.

With benchmark indices closing above their historic highs yesterday on August 3, it may be tempting for the bulls to expect the momentum to continue and for the bears to sit on the fence waiting for a correction. Timing the market is an exercise in futility.

If you are a long-term investor, It is never a bad time to buy mutual funds, even when the markets are on a high, like it is currently. These are some of the aspects to keep in mind while doubling on equity bets.

Stick to SIPs during market high

Investors who do not understand the market dynamics should stick to systematic investment plan (SIP) in mutual funds.

SIP helps you to invest even a smaller amount in a consistent manner. This habit of regular investment benefits in bringing down the average cost of investment over the long term.

When you invest a particular amount in a fund at regular intervals, you buy more units when the price is lower and buy less when the price is higher. This way, you can average out the value of each unit which is called ‘rupee cost averaging’.

Your investment through SIPs should be based on your savings, and not at the changing market valuation, said a fund manager who wishes to remain anonymous due to compliance issues.

Look at the long term performance of the scheme before investing in high market

It would be wise to look at the long term performance of a mutual fund rather than the recent past performance. This is because the market rallied exceptionally during the second half of 2020, which led to stellar performance by most mutual funds.

Looking at the 3-5 years performance of a fund will give you a holistic view of how consistent the fund’s returns have been.

Diversify and stagger your investments

Most of the times, even when the markets are rallying, it may so happen that only a part of your portfolio is showing profits similar to that of the market.

It’s good to diversify your funds across categories like midcaps and smallcaps or specific sectors like technology and pharmaceuticals.

Systematic transfer plan

Another option to save yourself from the market volatility is by staggering your investment through systematic transfer plan (STP).

Let’s suppose an investor earns a lump sum through the sale of a property. S/he can choose to invest the entire amount in a low-risk fixed income fund and, then, systematically transfer a fixed sum into an equity fund.

By regularly transferring money into an equity fund, the investor can stop worrying about the market level.

“If we don’t face a big third wave or further lockdown, economic recovery is clearly on track. Market will try to factor too much into the future so for that reason retail investors should stagger investment over the long period of time through STPs. Besides, the minimum holding period across market cycles in equities should be 3 years,” said Sorbh Gupta, fund manager at Quantum Asset management.

Timing the market can be counterproductive

Stock markets are inherently volatile and ups and down are a part and parcel of the asset class. Hence, timing the market would be a wrong decision as waiting for a market correction to start investing would result in loss of opportunity.

This tells one should continue investment even at high levels as eventually the market will go up and so will your mutual fund returns.

“Timing the market based upon the price that you see on the screen is never a good idea...timing the market based on valuation can make sense but I am not sure how many people understand that. It is more of a behavioral science, when the market corrects one believes that it will correct more and they don’t deploy (money) and when market moves up you believe it will go up further and you deploy,” Gupta added.

Choose funds as per your investment profile

Financial goals, risk tolerance and investment horizon should be in the priority list of every investor. The idea is to invest as per your risk appetite and market levels should not hinder your financial goals.

For example: if you are investing in mutual funds with a goal to finance your retirement years after say 25-30 years, a sudden spike in market levels should not stop you from investing. You need to continue investment in whatever funds you have invested in.

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