Don’t Time The Market While Investing In Equity Funds

The stock market has done well over the last one year and is likely to continue its good show over the next few years. However, the increased volatility over the last few months has made investors a little anxious. Times like these can be more challenging for investors who invest through mutual funds as they are not fully well-versed with the nuances of investing in the equity market. It is important for every equity fund investor to know that when you invest with a defined time horizon and follow a disciplined investment approach through Systematic Investment Plan (SIP), these turbulent times benefit you by way of ‘averaging’. In fact, the main objective of following a systematic approach is to avoid committing too much money at one level of the market and benefit from the ups and down, which are an integral part of equity investing.

Then, there are investors who have been waiting on the sidelines for an opportunity to start investing in equity funds. Surprisingly, when the markets present opportunities for them to invest at lower levels, more often than not they find it difficult to take the plunge fearing that the markets could go down further. The key thing to remember here is that even the most seasoned investors find it difficult to time the market consistently. Therefore, the right way to initiate the process would be to follow a goal-based investment approach which requires one to establish different goals to be achieved over different time periods and work out the amount that needs to be invested every month to achieve these goals.

A clearly defined time horizon allows an investor to decide an ideal asset allocation. Remember, asset allocation play a role in deciding how much risk you would be taking and what kind of returns you can expect from your portfolio. In other words, the selection of funds plays a limited role in the kind of returns you earn on your portfolio. Considering the mystique that surrounds the stock market, even the most experienced investors flounder when they are faced with tricky situations. Therefore, it is extremely important for you to keep focus on your time horizon as any hasty decision could have a long-term impact on your ability to achieve your investment goals.  Here are a couple of such situations and how you need to tackle them: 

Should I book profits periodically?

Every time the market turns volatile, investors start wondering whether they did the right thing by allowing the profits to ride on. The fact, however, is that with any investments including mutual funds, there are two key decisions to be made. The first is when to buy and the second is when to sell. Obviously, the difficult one is to know when to sell. The right way to tackle this issue is to have a strategy in place keeping in mind the original asset allocation, time horizon and the investment objectives.

For those who may have to pare their exposure to a particular asset class as they approach the completion of their time horizon, the right approach would be follow the practice of rebalancing the portfolio. This removes emotions from the investment process and helps in avoiding the urge to time the market. This can be an annual exercise as it will bring in discipline in the decision making process and make this exercise tax-efficient too.

Should I wait for the market to bottom out or invest in a phased manner?

The increased volatility in the market has made some investors a little nervous. In fact, for those waiting on the sideline to start investing, such turbulent times can be quite testing. No wonder, they often face this dilemma whether they should wait for the markets to bottom out or start making part investments at different levels. For someone who has a lump sum to invest, the prudent way to proceed would be to invest a part of investible funds as a lump sum and the balance systematically over a period of time through a Systematic Transfer Plan (STP). Through STP, one can transfer a fixed sum at a pre-determined interval from a liquid or a floating rate fund to an equity fund of the same mutual fund.

The best thing about STP is that it allows you to enter into the equity market at different levels which curtails the risk as compared to a situation whereby you try to time the market by investing a lump sum. The exact proportion of the lump sum and systematic investing would depend on your risk profile and time horizon. This way, if the market drops, you would suffer a smaller loss and can buy more units at lower prices through systematic investing.