The Sensex is at a new all time high after breaching 13,000 level. The stock market has had a remarkable run since touching its low of 8900. Needless to say, the last five months or so have been quite eventful for investors in equity funds.
If one were to analyse the behaviour of investors during this period, there are lessons to be learnt for existing investors as well as for those who intend to make equity funds an integral part of their portfolio.
Market ups & downs
When the market was going through the correction phase, some of the investors panicked and exited from equity funds. Needless to say, not many of them could re-enter and surely must be ruing their decision.
On the other hand, seasoned as well as those investors who believed that the best course of action was to hold until the markets made up the lost ground, did not react at all and held on to their investments in mutual funds.
However, the key here is that both the classes of investors failed to recognize the lower market values as buying opportunities. That's why, it is often said that the best way to benefit from equities is by having a long- term view as well as by refraining from timing the market.
Now, let us talk about those investors who were investing regularly through a Systematic Investment Plan during this period. Needless to say, they were best equipped to not only handle the downside but also benefit from lower market values.
Invest regularly
Though a lot has been written about SIPs, it is often perceived as an option only for small investors. The fact of the matter is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows investors to invest in the stock market at different levels without having to worry about the market levels and the market movements in the short-term. Remember.
When you opt for regular investing, you abandon any strategy that might control timing of your investments. In other words, you continue to invest irrespective of market conditions. This strategy works very well partly because of "averaging" and partly because in the long run markets move upwards, in spite of short-term falls.
It is not to say that one should not invest a lump sum amount in equity funds. For a long-term investors, making a lump sum investment is not an issue, however, a lump sum investment should not be the end of the story.
Instead, it should be taken as a beginning of an investment programme to build wealth over time and needs to be followed by regular investments as and when investible surplus is available. Either which way, the key to successful equity investing is making investments on a regular basis.
Don't try to time the markets
One often comes across investors who wait for months in anticipation of a correction in the markets. However, more often than not, they end up investing in a panic as the markets scale newer heights. At times, a small correction in the market seems like a great opportunity to them and as result they end up investing at much higher levels compared to the level prevalent at the time when they had originally planned to invest.
I am sure there are many investors who must be wondering whether they should be investing in the markets at the current levels or not. Though, the prospects of the markets look promising from the long-term point of view, it may be prudent for a new investor to adopt a strategy whereby a part is invested as a lump sum and the balance by way of systematic investing.
The exact proportion of the lump sum and systematic investment would depend on one's risk profile and time horizon. This way, if the market drops right away, one would suffer a smaller loss and can buy more units each month at the lower prices.
Take help of a professional to determine the right levels for you. For systematic investments, you can opt for a Systematic Transfer Plan. Under STP, you can invest the lump sum in a Floating Rate or a Liquid Fund. From there, you can instruct the fund to transfer a fixed sum at a pre-determined interval to an equity fund.
There are many investors who do not find regular investing very exciting. They also find the whole process a little cumbersome. It is important for investors to realize that investing in equity funds is not about excitement but a sensible way to build wealth through healthy real rate of returns. However, the key is to concentrate on selection and maintaining the disciplined way of investing.
It is often said that 90 per cent of the investment success depends on the quality of the portfolio and the right mix of funds investing in different market caps and the remaining 10 per cent on timing the investments. In reality, many investors spend 90 per cent of their time "timing" their investments.
Now, a few words on the selection process. It is important to select the funds after careful deliberations especially keeping your risk profile, time horizon and investment objectives in mind. You will find some brokers constantly approaching you with new products.
You need to learn to say 'No' to products you don't really want or need. In other words, be wary of 'buy now while the stocks last' sales pitch and always keep your long- term investment objectives in mind while building your portfolio.
The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hemant.rustagi@moneycontrol.com
For more on mutual funds, log on to www.easymf.com