Don’t Let Market’s Dizzy Heights Disrupt Your Investment Process

Chief Executive Officer, Wiseinvest Advisors 

India’s benchmark Nifty conquered the 10,000-mark for the first time ever in the month of July. The Sensex also hit a historic peak of 32,300 level. The markets have been performing extremely well since the presentation of the Union budget 2017 in the parliament. So far this year, the Sensex and Nifty have gained around 21 per cent and 22 per cent, respectively. However, the question on most investors’ mind is whether there is a need to exercise some caution at these levels. While such dizzy heights in the market usually breed a mixed feeling of euphoria and skepticism among investors, there are factors such as steps being taken by the government for introducing reforms and lowering inflation, strong domestic inflows and low oil prices that are making the market participants confident about continuation of the rally even as valuations remain high. 

If you are in the midst of your investment process or are looking to initiate it now, you must not allow such dilemmas to disrupt your thought process as the key to sustained investment success is to continue your investment process un-interruptedly through different moods of the market. However, to be able to do so, you need to interpret the perceived risk and reward properly and understand the importance of creating the right balance between these two important elements of your investment process. 

IS IT THE TIME TO EXIT? 

There are two key decisions to be made for your investments. The first is, when to buy, and the second is, when to sell. Obviously, the difficult one is to know when to sell. However, if you follow an asset allocation model and stay committed to your time horizon, you won’t face this dilemma of what to do with your investments during the periods when the markets do very well and when they don’t. For example, if you are investing through SIP to build a corpus for your retirement that is, say, 15 years away, there is no need for you to give undue importance to market’s highs and lows as you are still in the midst of your investment process.

Remember, your time horizon begins when you invest and ends when you need to take the money out. The length of time you remain invested is important because it can directly affect your ability to reduce risk. Longer time horizons allow you to take on greater risks, with a greater potential to earn better returns, as some of those risks can be reduced by investing across different market environments. 

WILL IT BE RIGHT TO START INVESTING NOW? 

If you are one of those investors who have been waiting on the sidelines for a correction in the market to start your investment process, the decision-making can be a bit tricky. It is a well-known fact that even experts find it difficult to predict short term movements in the markets. Hence, it may be a futile exercise to keep waiting for that correction. However, considering that volatility is a natural phenomenon in the stock market, the right way to proceed would be to invest for the long-term in a disciplined manner. It is equally important to choose your funds well, as these would take care of most of your worries in future. First, you must ensure that your investment objectives match with that of the funds you intend to invest in. Second, you must have a close look at the fund’s investment philosophy as it would help you understand the fund manager’s approach to stock selection, risk assumption and the anticipated level of portfolio turnover. Third, keep an eye on the level of diversification in the portfolio of the fund. Although mutual funds are diversified by nature, there are funds that follow a strategy of taking concentrated bets. The choice between a diversified and a concentrated portfolio will largely depend upon your risk profile. Remember, a well-diversified portfolio enables you to spread your investments across different sectors and market segments. 

Last, but not the least, a fund’s long-term performance track record has to be given its due in the selection process. However, it is critical that you keep performance in proper perspective. The right way to analyze performance is to compare it with the peer group as well as its benchmark. Also, look for consistency in performance and avoid funds that show high returns in the past, but are inconsistent over different time periods.