Its The Approach That Matters

At a time when the stocks are trading at historic highs, it is quite natural for investors to take a cautionary stand. However, often enough, either they tend to stop investing and stay away from the market or take money off the table and sit on the sidelines waiting for corrections. Such a strategy does well if one needs money or there is a foreseeable expenditure in the near future. Putting the investment process on halt just because the markets are elevated could be damaging. In such a situation, what should an investor do? A strategic approach to investment with a clear focus on the basic rules of investing without any investment bias is the key.

Here are five points which an investor should focus on while investing: 

1. Don’t Ignore Asset Allocation : Asset allocation is the base of any investment portfolio, irrespective of the market condition. Do not put all your investments in equity-related instruments alone. Allocate funds to debt assets as well in order to balance your portfolio since debt aids in delivering steady and reasonable returns. One needs to diversify and spread risks across the asset classes in order to avoid any knee-jerk reaction arising out of a concentrated investment portfolio.

2. Opt for Value-Based Funds : Equity funds which follow value style of investing should be one of the preferred choices of investors who are ready to stay invested in equities with a long-term perspective. Such funds have a portfolio of stocks which are undervalued even though they are fundamentally strong. Currently, even though benchmark indices are at an all-time high, there are several pockets of value available in the market. Investing in such funds thus provides investors an opportunity to harness growth despite the broader market level being high.

3. Dynamic Asset Allocation Fund : Investors whose risk appetite is low to moderate may consider the balanced advantage category of funds offered by mutual funds. These funds tend to be steady performers across market cycles. Due to the in-built feature of dynamically balancing its assets between debt and equity on a daily basis, these funds can dramatically increase their allocation to equities when stocks appear undervalued and cut investment in stocks when they are overvalued. As a result, investors get the best of both asset classes – debt and equity – and the portfolio remains largely diversified across the sectors.

4. Avoid Lump Sum Equity Investment : Investing a large sum at one go in equity-related instruments may prove hazardous, especially at a time when the markets are at elevated levels. A staggered way of investments should be the preferred approach. Systematic investment plans (SIPs) of mutual funds, no doubt, are the most tried and tested form of staggered investment at regular intervals. Such investment tools offered by mutual funds not only help investors get the benefits of market cycles but also aid in attaining various financial goals comfortably.

5. Use STP as an Effective Tool : The investment tool of systematic transfer plan (STP) is a very handy and effective option for investors looking for lump sum investment. Simply put, STP is a systematic and automated way of transferring funds from one scheme to another scheme of the same fund house. The only difference between SIP and STP is that in case of SIP deduction or transfer of money to the chosen scheme happens from the investor’s bank account while in case of STP the same happens from an existing scheme of the investor to the chosen scheme.

At a time when the equity market is hovering around historic high levels, investors who want to invest lump sum should ideally go for STP from a debt fund to an equity fund. They can invest lump sum in a debt fund and set a date for systematic transfer to an equity fund of one’s choice. The frequency of such an automated transfer can be weekly, monthly or quarterly. In this way an investor continues to earn relatively predictable returns from debt funds and simultaneously the risk of timing the stock market decreases with regular transfer of desired funds from debt to equity schemes. Even in case if the market turns volatile, you need not worry about equity investment as it is being done in a staggered manner.

The writer is the Founder Member, Investment Hub • Email: investmenthub@rediffmail.com •  Website: http://Investmenthub.in