Rediscover Your Faith In Equities

Over the last couple of years, the markets have been on a roller coaster ride. Investors have been reacting differentlyto this volatility in the market. While on one hand, there are investors who have continued their disciplined investment approach, on the other hand, there are also those who have put a halt to their investment in equity funds. This mixed reaction is quite similar to what has been witnessed over the years during extreme bouts of volatility.

However, it is heartening to see that investing through Systematic Investment Plans (SIPs) has allowed an increasing number of investors not only to stay invested, but also to continue their investment process. It is now time for others to avoid taking hasty decisions in panic so as to get the best out of their equity fund investments.

Key Points:

• Market volatility is a natural phenomenon, and hence all equity fund investors must be prepared to tackle these ups and downs.
• Investing through Systematic Investment Plans (SIPs) has allowed an increasing number of investors not only to stay invested, but also to continue their investment process.
• A disciplined approach of investing at pre-defined intervals can go a long way in helping investors to avoid investing a large sum at a particular market level.

No doubt, investing fresh money as well as holding on to existing investments during extreme market volatility can be quite nerve-wracking. However, the fact remains that market volatility is a natural phenomenon, and all equity fund investors must be prepared to tackle these ups and downs. Investing in equity funds with a defined time horizon and investment objectives can help investors manage volatility, as the focus remains on long-term goals.

We have all heard that equities have the potential to outperform other asset classes over the long-term. However, to ensure that one gets the best out of equity investment, it is important to make the right selections as well as to follow the right investment strategy. Equities not only require a time commitment, but also the dedication to continue the investment process through the market ups and downs over a defined time horizon. Another important aspect is to have the required flexibility to realign one’s portfolio in keeping with the changes in one’s circumstances, the markets and economic conditions.

A disciplined approach of investing at pre-defined intervals can go a long way in helping investors to avoid investing large sums at a particular market level. This is important as many of us have the tendency to chase performance in a rising market, and hence, often a major chunk of our investments is made in equity and that too in funds that hog the limelight. This often results in over-exposure not only to an asset class, but also to certain sectors and segments of the market like Mid-Cap and Small-Cap.

Investors should remember that diversified funds should be the mainstay of their portfolio, and exposure to aggressive funds, i.e. Sector, Specialty, Mid-Cap and Small-Cap funds, should be limited to 30-35 per cent of the portfolio value. Of course, the exact level of exposure can differ depending on one’s risk profile and time horizon.

History shows that quality diversified funds yield above average returns. The years of spectacular growth help even out the portfolio returns during bear markets. Therefore, it is vital that investors should not allow their expectations to be distorted by extraordinary returns during bull runs or by dismal returns in falling markets.

Coming back to the need to realign portfolios, many investors simply refuse to make changes despite the unfavourable mix of funds in the portfolio. That is because they don’t like the idea of booking losses. More often than not, they take it as a personal defeat and refuse to exit from a fund unless the NAV reaches the level at which they entered the fund.

Investors need to realise that banking on a fund that has been underperforming on account of faulty stock selection and/or investment strategy is not a great idea. While it doesn’t make sense to make changes in the portfolio every now and then as every fund goes through a phase of indifferent performance, retaining a proven non-performer can be also detrimental to one’s financial future.

Remember that by making the right moves now, you can benefit immensely. In addition, to achieve success on a continuous basis, make rebalancing of your portfolio a rule rather than an exception.

Hemant Rustagi
CEO, Wiseinvest Advisors Pvt Ltd.