What should equity mutual fund investors do when the market is near all-time highs?
The markets are certain to become volatile and unpredictable in the short to medium term, but in the long run, they have proved to drift upwards. As a mutual fund investor, you must stay involved in order to fulfill long-term goals and take efforts to reduce the impact of market volatility while reaping the rewards of long-term investing.
All MF investors who invest through SIPs may continue to do so. And there are compelling reasons to do so. SIPs do not expose all of your funds to market volatility all at once. When the index falls, they buy more units; when the index rises, they buy fewer units. This method aids in the accumulation of units, the average cost of which is lower than would otherwise be the case. The SIP strategy reduces the risk of volatility.
Equity markets are characterized with volatility and unexpected events, resulting in unpredictable results. Buying low and selling high is an excellent approach to earn from it. However, this is easier said than done. While attempting to time the market is useless, there is a scientific approach to keep your buying price low without having to second-guess the market.
Following a process termed as Systematic Investment Plan (SIP), you could achieve a higher return from the equity asset class than otherwise. Even new investors can make use of SIP. And all it takes for you to follow SIP is to invest regularly, for long periods of time. SIPs are a regular investment plan available on all kinds of mutual fund schemes, though they are the most effective in equity schemes, as equity is a more volatile asset class than debt. SIPs help you profit from volatility by automatically buying you more units when prices are falling and fewer units when prices are rising, thus lowering your average purchase price, while inculcating some much needed discipline into your investing habits.
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Further, an SIP restrains you from going overboard in a rising market, by giving you fewer units at those higher levels. Over long periods of time, at least a market cycle, this disciplined approach to investing tends to bring down your average unit price. At most times, your average unit cost will always be below your average sale price per unit, irrespective of whether the market is rising or falling. Only in extremely bearish phases, will an SIP investor show a loss. They are most effective over long periods of time. Further, by staying invested for a long period of time, you profit from the appreciation equities tend to show over the long term. However, you still have to choose your scheme well. SIP will backfire if you do it on a losing portfolio.
High stock market volatility often leads to conservative investors, as fear and potential capital loss can discourage them from taking risks. To invest a lump sum in current markets, consider investing partly in debt and partly in equity, especially through STP. This involves initially transferring funds from a liquid or debt fund to an equity fund on a regular basis.
Conclusion
Predictors should be avoided at all costs. Market movements are influenced by complex, interconnected factors and global events. Technical support levels can be lost, and investing based on forecasts can be financially disastrous. Markets may reverse or bounce back in no time. It is impossible for anyone to foresee the movement of markets. Period.
To make informed selections during periods of high stock market performance, equity mutual fund investors should review their investment goals and risk tolerance, consult with a financial advisor, and stay informed about market movements.
Author: Sanjeev Puri
Published: Investors India Magazine, November 2023 Edition
