7 MinsFeb 09, 2021
The Budget 2021 did not have any specific measure on investments or tax rates. But the equity market saw huge gains, perhaps encouraged by the announcements made by the Finance Minister, which met most of the market expectations with hardly any negative surprises. What should you, as a retail investor do in such a situation? Is this a good time to invest, given that there may be further gains to be made? Or should you stay away from equities for now, as traditional wisdom advises against investing in market highs?
The answer may vary depending on your situation and based on factors such as your total equity exposure, risk-profile, etc. But it is safe to say that while you should not get carried away by irrational exuberance, not investing in equities at all may mean missing out on opportunities. Here are seven mistakes to avoid when investing at a market high:
Expecting supernormal returns over the short-term
Don’t get blinded by the outstanding market returns. Be realistic in your return expectations and the time horizon. Equity assets may not always deliver supernormal returns over a short period. There could be times when the markets may correct or consolidate, and therefore, ideally keep a time horizon of at least five years when you approach equities – be it stocks or equity mutual funds.
Picking stocks or equity mutual funds based on short-term outperformance
It is a mistake to approach stocks or equity mutual funds looking only at their short-term outperformance. Evaluate the portfolio characteristics in case of an equity-oriented mutual fund scheme, how they have fared across market cycles (bull and bear) and whether it suits your risk profile. What distinguishes a good and bad bet is the consistency with which a stock or equity mutual fund scheme has generated wealth for its investors. Do note that the past short-term (and also long-term) performance is in no way indicative of future returns.
[Also Read: Know how much it costs to invest in mutual funds]
Selling quality stocks and equity funds on short-term underperformance
In a market rally, often it may happen that not all stocks and equity mutual funds will perform handsomely -- even though their underlying fundamentals may be respectable. If you have quality stocks and mutual funds in your portfolio, do not rush to dump them solely based on their short-term underperformance. Don’t commit the folly of gauging the performance over the short-term and missing the bigger picture.
Having said that, if the underperformance persists year after year, you should weed out those underperforming stocks or equity mutual funds.
Increasing exposure to mid-caps and small-caps
In a market rally, the valuations of mid-caps and small-caps may rise more as compared to large-caps. Based on that, if you increase your exposure to mid-and-small-caps and the broader market corrects, these segments may plunge much more than large caps and may prove to be a costly mistake.
It would be wise to consider mid-caps and small-caps only if you have a high-risk appetite and an investment time horizon of at least five years. Allocate sensibly between large-caps, mid-caps, and small-caps as per your risk profile and rebalance the exposure as and when required to avoid taking undue risk.
Stopping regular investments
Becoming over-cautious and stopping regular investments is not a good idea either, as it may not help you achieve the envisioned financial goals. Going forward, even if the market hits turbulence and volatility increases, continue to invest regularly and systematically. Systematic investments can help investors benefit from volatility in the markets. Since fixed sums are invested at regular intervals, an investor buys more number of units when the markets are down and the Net Asset Value (NAV) is low; and less number of units when the markets are up and the NAV is high. Thus, providing an opportunity to lower the average purchase cost of units and help investors gain when the markets recover in due course. Volatility is the very nature of the equity market. It is up to us to use it to our advantage by devising an efficient investment strategy.
Investing in an ad hoc manner
Investing is an individualistic exercise. There’s no point aping or mirroring someone else’s investment portfolio; because each one’s risk profile, investment objective, investment time horizon, and financial goals are different. Aimlessly investing in any and every stock or mutual fund (or any other avenue), may not help you clock optimal returns and achieve the envisioned financial goals.
Failing to review or re-balance your portfolio
Over time your financial circumstances or personal risk profile may change, inflation may move faster than expected, or you may wish to adopt a new investment style. These factors warrant a portfolio review and rebalancing at a fixed frequency but also the peak and troughs of the markets. This will help align the investments as per your risk profile and reset the asset allocation within the limits best suited for you. It will also help weed out underperforming investments and improve the risk-adjusted return of your portfolio, and keep you on track to accomplish your financial goals.
What should be the strategy to invest in equities now?
Choose the MF route: If you are not well-versed on with stock selection process, it would be wise to approach equities via worthy equity-oriented mutual funds as they are professionally managed, offer better diversification, help lower the cost of investing, are liquid, and potentially deliver appealing returns.
That being said, the selection is key. To get the best of both worlds, i.e. short-term high-rewarding opportunities and long-term steady-return investing, structure and position wisely as per your needs with a mix of market capitalisation and investment styles basis your risk profile and investment horizon.
Stagger your investments: If valuations look stretched and chances of a correction cannot be ruled out, it is advisable to stagger your investment. Do not deploy the investible surplus all at one go. If investing in mutual funds, the Systematic Investment Plan/Systematic Transfer Plan route is an easy way to achieve this. This will ensure that more units would be allotted against your instalment when the market corrects, and when the market begins to ascend again, it would compound your wealth.
Over the long-term (3-5 years), equity as an asset class looks promising for wealth creation and to counter inflation, provided you have a high-risk appetite and are willing to give your investments sufficient time.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision