The Indian stock markets have done very well over the last one year. The rally that has helped the Sensex reach the current level of around 17,500, after touching a three-year closing low of 8,160 in March 2009, has truly been a remarkable one. The strong economic growth and ample liquidity have been major contributors to the stock market’s good show. While the markets have regained the lost grounds to an extent and are showing promise for future growth too, the frequent bouts of volatility have begun to make investors jittery.

So, the moot question facing equity fund investors is whether they should review their portfolio now or continue with the present allocation in their pursuit to achieve long-term investment goals. First, equity fund investors need to realise that they are likely to face these situations from time to time. Second, for an equity investor the key factor to be considered is the long-term growth prospects of the economy as well as the quality of the portfolio. Third, it is true that reviewing portfolios on an on-going basis is an important ingredient to ensure success over the longer term, it may not, however, be a smart thing to do every time the market turns volatile. Volatility in the stock market is a natural phenomenon and the best way to deal with it is to keep focus on long-term investment goals and avoid react-ing to short-term market movements. 

In reality, investors’ reaction may actually vary depending on their time horizon, risk profile and the reasons for invest-ing in equities. As regards the issue of portfolio review, it is advisable to do so in greater detail only when one’s invest-ments goals or financial circumstances change. Therefore, while reviewing the portfolio, it is important to consider how the portfolio is performing from the view point of one’s personal goals. Rebalancing the asset classes can be another reason for reviewing the portfolio. Portfolio rebalancing is a process of bringing the different asset classes back into a proper relationship following a significant move in one or more. The right way to do this is to decide the frequency for rebalancing in advance rather than making it an event-based exercise. 

A situation like the current one can also be a testing one for those investors who are looking to start investing in equity funds as well as those who have been waiting for an opportune time to make additional investments. While most of us would like to enter when the markets are low, only a few can achieve this on a consistent basis, if at all. Therefore, the right way to invest would be to follow a disciplined process and carry on with it irrespective of the short term market moves. While for a new investor, making a beginning through systematic investing either by way of a Systematic Investment Plan (SIP) or a Systematic Transfer Plan (STP) can be ideal. 

For existing investors the right strat-egy would be to follow a combination of a lump sum and systematic investment. For those who may not be familiar with STP, in this approach one instructs the fund house to trans-fer a fixed sum at a pre-determined interval from a liquid or ultra short-term income fund to an equity fund of the same fund house. The best thing about systematic investing is that it allows an investor to enter into the equity market in a disciplined manner and that reduces the risk that one takes while trying to time the market by investing a lump sum. 

The exact proportion of the lump sum and systematic investing would depend on one’s risk profile and time hori-zon. This way, if the market drops, one would suffer a small-er loss and can buy more units at the lower prices through systematic investing. However, investors will do well to remember that only long-term funds should be invested in equities so that they can benefit from the true potential of this wonderful asset class. Also, once the process begins, one needs to carry on with it irrespective of which way the market moves. Remember, in the long run, equity remains the only asset class that has the potential to beat inflation and make your money grow at a healthy rate.