Focus On Your Goal, Not Market Timing

If you are an existing equity mutual fund investor and witnessing the all-time high stock market levels, there is nothing much you need to do. If your goals are still a few years away, you need to ride the upside to your advantage. 

Investing is for a purpose and must be with a plan in place to achieve your goals. Whether the goals are for the medium-term such as arranging a down payment for a home loan or long terms such as accumulation of funds for children needs or your retirement, your savings need to be earmarked towards them. Once you begin the journey of investing, the focus should remain on the goal. For goals that are far away, the role of the equity asset class has been well proved. Several studies in the past have shown that equity as an asset class has generated high real returns compared to other assets over the long term. 

As a retail investor, equity mutual funds remain the best step forward to utilise the potential of equity assets over the long term. However, equities are known to be volatile especially over the short to medium term. Therefore, one mantra of equity investing that has remained time-tested over several decades is never to time the market. 

If one thinks that redeeming funds now is a better idea as the markets are at a high level, think again. Catching the bottom has never been a successful approach even with market experts and other participants. A case in point is the fall in March 2020 when the market fell by over 30 per cent in a few days but rebounded almost 100 per cent within the next 12 months. The SIP investors who opted to remain invested are today sitting pretty and reaping the benefit of staying invested. 

Your savings in an equity mutual fund are invested in stocks of different companies listed on the stock exchanges. There will be a period of ups and downs in the stock market which is part of the market movements. There will be several bouts of volatility with markets crashing by over 1200 points in one day and there will be days when markets go up by over 1200 points in a single trading session. Be aware of the fact that equities tend to drift upwards over the long term and short-term gyrations should be taken in one's stride. 

For those who still may not want to put in a lump sum amount into the market at this high level, there is a better approach to manage funds. You can use the STP facility to expose your funds intermittently into the market. Under STP, you initially invest in a liquid fund, from where a fixed sum of the fund is invested into the equity fund at a regular interval of say three or six months. In this way, you may tide over the volatility over the short term and yet participate in the equity asset class. 

But yes, for some investors, the current high stock market level may be the opportune time to maximise the returns from your equity investments. Only if your goal is nearing and within five years from now, you need to adapt the de-risking strategy. To preserve the capital, you may start shifting funds from equity funds to less volatile debt funds. However, remember, if retirement is the goal you still need exposure to equities during the non-earning period of your life. 

Use the opportunity to review your portfolio to see if your portfolio is well diversified across market capitalisation, sectors, and fund houses. Build a plan by earmarking funds to your long-term goals and use the equity funds to your advantage. Rather than chasing returns, building a core portfolio that can help you meet your goals 10-15-20 years down the road is what you should focus on. 

The author is Executive Director at Findoc

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.