Aug 08, 2011, 11.09 AM IST | Source: Moneycontrol.com

Four things you MUST NOT do while investing in MFs

Panic always leads to disaster. When markets are bad, instead of hitting the panic button one should think rationally to enjoy better relationship with their investments. Here are four things that an investor should avoid while investing in Mutual Funds

Suresh Sadagopan

Founder, Ladder7 Financial Advisories

Expertise : Mutual Funds

More about the Expert...

When it is high tide, it lifts all the boats. Similarly in a bull market, irrespective of which fund one is investing in, an investor makes money. It is when the markets turn, that the investors find that some of the funds are found wanting and feel the pain. Warren Buffett, in his inimitable style had referred to the very same thing When the tide turns, it will show who has been swimming naked!

Thats how many investors feel now naked exposed. That brings an irrational fear and many tend to take rash decisions at this point. But such decisions will only backfire on you. There are some things which an investor should not do now. Here they are

1. Exit in a hurry That would be one of the worst decisions.  There are many number of people who had predicted in the recent past that the market will touch a Sensex level of 15,000. But, it has gone up to 18,700 levels. Markets have a way of surprising even the most seasoned operator. Many think that they know enough to predict the market. The fact is that there are far too many variables for anyone to predict the market correctly. The most important thing to understand is that Equity markets perform, over time. Sensex has returned about 18% CAGR over the period from 1979. That should give you comfort. Though stocks go through their periods of gut-wrenching correction, they would perform over time. You could review your portfolio and remove deadwood and average performers.  Other than that, just stay invested.

2. Stopping SIPs This could be the second worst decision. Systematic Investment Plan (SIPs) essentially helps you to invest without resorting to timing the market. In fact when the markets are doing badly, if you persist with your SIPs, it helps in purchasing at low prices, which will yield handsome returns when the market turns, as it eventually will.

3. Shifting from Equity to debt - If this is a part of the asset allocation strategy, it is fine. However, most times, it is not.  When equity markets plunge, panic grips investors who just want to flee to the safety of debt funds. Debt instruments today are probably offering one of the best returns in a long time, what with interest rates at near peak levels.  Keep the equity allocation intact. In fact, if you really want to play by the rules of asset allocation, you should increase equity allocation as they have lost in value and to restore the original allocation one needs to invest more in equity. But this is easier said than done.

4. Trying to time the market Most people, including yours truly, have burned their fingers trying to time the markets. We all have that brimming self-confidence about our ability to get the timing perfect. But that works very well in fairy tales not in real life. Yet, almost everyone is trying to do just that. I, for one, have realized that timing the market correctly is next to impossible.  Simply stay invested for the long term, instead of redeeming when you feel the market has reached its peak and trying to invest when it has reached its lows. Chances are, both times you might get it wrong.

Panic not. Continue your SIPs. Forget about shifting from Equity to debt to maximize returns you might actually underperform when the markets start their phantom-rising act. Time in the market is more important than timing the market. I know it is a clich but worth its weight in gold.

-Suresh Sadagopan

The author is a Principal Financial Planner at Ladder7 Financial Advisories

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