In order to remain worry-free of rising and declining markets, invest in a systematic investment plan
Investing in mutual funds (MF) when markets are at all-time high should not be worrisome, if you follow basic guidelines.
In the last five months, Sensex has gained almost 14% in absolute terms and in between this run it touched the-all time high. The question on every investor’s mind currently is - should I invest in the current market scenario? The current P/E ratio of Sensex is in the range of 22-23, which means the market indeed is overvalued since the P/E of a fairly valued market is around 17-19.
So, should I refrain from investing in mutual funds in this bull market?
The answer to the above question is not simple. Timing the market is next to impossible and is not advisable; however, one can take steps to reduce the risks associated with the fluctuations in the market.
SIPs to the rescue
The best solution to remain free from the anxiety of rising and declining markets is to invest in a systematic investment plan (SIP) of a mutual fund. Investing in MFs through SIP takes care of market highs and lows by averaging them out and reduces risk while providing decent returns.
How about lump sum investing in mutual funds? If you have a lump sum to invest then take the systematic transfer plan (STP) route. STP transfers your chosen amount from one fund to another in a periodic manner wherein the period could be monthly, quarterly, etc. We suggest you park the lump sum in a liquid fund which will give you 6%-8% return and use STP to transfer the money to an equity fund and average out the risk of investing in a high market.
Which funds should I opt for when mutual fund market is hitting all time high?
Choose the funds which have done well overall and have a good track record of beating the benchmark even in a bear market. For example, Birla Sun Life Frontline Equity Fund has beaten the benchmark and the peer funds in the category for last 10 years.
Goal-based strategy
The stock market is cyclical, it will keep having highs & lows but in the long term (10 years or more) the returns have been almost similar despite the market condition at the time of making the investment. Hence, do not alter the strategy for your long term goals, such as retirement planning and continue with your investments and ongoing SIPs.
For any immediate goal (i.e. less than three months), invest in liquid funds as many of them have the feature of instant redemption.
For goals which are up to one year away, you may look into investing in ultra short-term funds.
For goals which are one-three years away, choose from the debt funds available as they are less volatile than equity funds. For goals set for next three-five years, choose balanced funds which less riskier than equity funds and more lucrative than debt fund.
For the goals having a horizon of more than three years choose from the equity fund categories of multi cap, midcap, large cap, etc., based on your risk appetite.
Should I book my profit? If your investment goal is completing in near future, i.e. in next 6 months or so, then you should book the profit and invest the proceedings in a liquid or ultra short term fund. For all other goals, continue with your investment and SIPs.
The central idea of this is very simple, start early and invest regularly. However, how to invest regularly and risk savings when market is so unpredictable?
It is true that the market is unpredictable and no astrologer can tell you whether the price of a particular share is going to go up or not tomorrow, but no one can deny that in the long run the investment in the equity linked schemes is going to pay-off for sure. So earning a handsome return out of it is no rocket science. The easiest way to tame this unpredictable bucking bull is to start SIP Investment
Markets are on a bull run but you have to stick to your plans and continue to keep investing through SIPs and be free of any worries of market fluctuations.
PLACE SAFE BETS
- In order to remain worry-free of rising and declining markets, invest in a systematic investment plan
- Choose funds with overall good track record of beating the benchmark despite a bear market
- For immediate goals, invest in liquid funds as many of them have the feature of instant redemption
The writer is founder and CEO, WealthTrust.in
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