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Dec 21, 2017 12:40 PM IST | Source: Moneycontrol.com

Stock market at record highs: How to avoid losses amid high valuations

If you adopt the right investment strategy, you can gain good returns on your overall portfolio.

Navneet Dubey @navneetdubey91

When we talk about returns on investment we generally consider it to be positive gains. However, returns on investment can also go negative, especially in assets such as equities. Equity investments are very volatile in nature and investing in them has a risk element attached. As an equity investor, you need to be cautious while entering the market because heavy concentration in equities in your portfolio can lead to capital erosion if the market slides.

However, if you adopt the right investment strategy, you can gain good returns on your overall portfolio.

Have a longer duration

Manish Kothari – Head of Mutual Funds, Paisabazaar.com says being market-linked, equities will take a beating during market corrections. You can reduce the risk of capital erosion by holding on to your investments for a longer tenure. Opt for optimum asset allocation mix based on your risk appetite and time horizon of financial goals. “Equities can be extremely volatile in the short-term and hence, one should consider investing in short-term debt funds for financial goals maturing within 3 years and in hybrid funds for goals maturing anywhere between 3-5 years. As equities beat other asset classes in long-term, invest in equities if you intend to remain invested for more than 5 years,” he said.

Have an STP and SIP approach

Opting for the Systematic Investment Plan (SIP) mode of investments would average your investments during market corrections. Additionally, it is also a risk mitigation tool which helps individuals to invest in equities systematically on monthly basis. You can also opt for STP’s (Systematic Transfer Plans) in case you have lump-sum to deploy.

STP is the best technique used to avoid market timings while investing a lump sum. Create market crash fund by investing in short-term debt funds and redeem them for investing in Equities during steep corrections. Simply, under such process, you can invest in liquid funds in a lump sum and then transfer your money to equity funds in a small amount on a periodic basis especially on monthly mode. Hence, instead of fearing market crash, treat them as opportunities to buy mutual fund units at lower NAV through STP approach.

Understand the market situation

Harsh Gahlaut, CEO, FinEdge says too many times, unadvised investors enter equities without understanding the risks associated with them. Typically, these investors are driven by emotions such as greed and fear or end up committing lump-sum money out of the famed “FOMO” or “Fear of Missing Out” syndrome. This is evidenced by the fact that with the index already having risen by nearly 26% this year, inflows into equities were Rs 20,308 crores in November. In comparison, when the index was 40-50% lower in 2012 and 2013, and markets were rife with opportunities, equity mutual funds witnessed outflows of Rs 15,133 crore and Rs 10,660 crore, respectively! Investors who end up deploying lump-sum purely based on past returns, without understanding whether the risks associated with the funds are aligned with their individual risk tolerance levels, can end up losing their capital if and when markets head south – as they are highly likely to book losses if their portfolio drops below a certain level.

Have a disciplined goal-setting approach

The key to avoiding capital erosion is by maintaining investing discipline and sticking to the roadmap of financial plan and goals made by an expert financial advisor. This reduces behavioural risks associated with investing and allows the investor the prudence of maintaining asset allocation while seeing through the ups and downs of the market thereby creating long-term wealth. "Additionally, a well-planned, goal-based, asset allocation based on a thorough evaluation of one’s risk appetite, followed up with a disciplined annual portfolio rebalancing, are the best defences against market crashes,” added Gahlaut.
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