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Keep Your Cool

| 9/27/2010 2:48 PM Monday

The stock market is going great guns and the Sensex is within a touching distance of the 20,000 mark. While the existing equity fund investors are quite excited about the sharp rise in the markets, those who have been waiting on the sidelines are still apprehensive about the sustainability of the current rally. Even the experts are finding it difficult to take a short-term call on the market as huge FIIs inflows continue to push the markets upwards. At the same time, considering the pace at which the markets have moved up in the last couple of weeks, some correction cannot be ruled out.

As we have experienced many a times in the past, the dizzy heights in the stock market and the mystic that surrounds it often evoke a mixed response from the investors. The greed to make more and more profits and the fear that emanates from unpleasant experiences of the past often grip their investment strategy. No wonder, even the current situation has created a few tricky situations for investors.

The future success of their investment process would largely depend on how they handle these situations. Let us discuss a couple of such dilemmas and the right way to handle them.  One of the queries is that of the portfolio not keeping pace with the rise in the market. Investors generally expect their equity fund portfolio to do better than the markets. If that does not happen, they get perplexed. At times, they get tempted to make wholesale changes in the portfolio. Needless to say, this is not a wise thing to do. It is important to understand that underperformance could just be a result of the way the market behaves during different phases and may not require any action on the investors’ part.

First of all, indices like the Sensex and the CNX Nifty only reflect the movement in a limited number of stocks. On the other hand, most of the actively managed equity funds generally have quite a few stocks that may not be a part of these indices.

Therefore, to analyse the performance of a diversified fund, one must consider a broader index like BSE 100. Besides, some of the funds could be having exposure in certain sectors or segments that may not have participated in the rally but have good prospects in the future. For example, in the current market rally, the mid-cap and small-cap stocks have outperformed their large-cap counterparts. Therefore, mid-cap funds, as well as some of the aggressive funds like opportunities funds, have performed better than those funds that have higher exposure to large-cap stocks. This should not be a cause for worry as different market caps and sectors perform differently at different time periods. Non-performance of a fund during certain time periods and that too in keeping with the market does not make it a bad fund.

 

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