Feb 06, 2013, 10.06 AM | Source: CNBC-TV18
In an interview to CNBC-TV18 personal finance expert, Hemant Rustagi of Wiseinvest Advisors shared insights on how one should invest in the market.
Hemant Rustagi (more)
CEO, Wiseinvest Advisors | Capital Expertise: Mutual Funds
Below is the verbatim transcript of an interview aired on CNBC-TV18.
Q: What precaution should an investor take when investing in a rising market to avoid the scenario when the market have rallied all the way and then you start buying in at the highs?
A: A rising market general evokes mixed reactions from investors. On one hand there are investors who invest in the market without a clear time horizon, without a clear goal. These are investors typically who invest when the market starts rising, in fact many of them enter into the market at the fag end of the rally. So, when the market starts correcting they stop investing fresh money and hold on to the existing investment in the hope that in future when the market goes up they can recover their losses. On the other hand there are investors who regret not exiting from the market at much higher level so they wait for the markets to go up again. They are quite determined that they are not going to miss out the opportunity next time.
So, when the market starts rising these investors start exiting from the market at different phase of the rally. Therefore, some of them either cut down their losses and some recover their losses and some exit after making some profits. However, depending on what stage of the rally if the rally continues they lose out on the market. Case in point here is the last six-seven months. If one notices, every single month the equity funds have been facing net redemption. Hence, the fact is during this seven month period the markets have risen by almost 22 percent. Then there are investors who do not invest when the market is going down expecting the market to go down further. So when there is a u-turn in the market suddenly they have this left out feeling and they become quite aggressive investors and repeat the same mistake of investing either without a clear goal or without clear time horizon in mind.
Therefore, it is always important for investors to remember that the right way to invest in all asset classes including equity is to follow your asset allocation model and continue the process irrespective of the market conditions. Even for a long-term investor it is very important for him to reduce the exposure to equity when there is a significant tilt in favour of equity due to rising market. However, there has to be a strategy, it should not be done in a haphazard manner. One such strategy is rebalancing the portfolio. Now rebalancing is a method that allows investors to bring their portfolio back to the original allocation. Now what it does is that in a rising market it allows an investor to exit from equity and go into debt but there have to be certain points that investor have to remember. One, it should not be done every now and then, it should be done hugely once in a year and it should be done only when there is a significant move around 10 percent or so only then the rebalancing should be done. Another important point for every equity investor is they need to realise that volatility is an integral part of equity investing. So, every one who invests in equity has to contend with that.
Thankfully there are strategies like invest for long-term and invest systematically. One can not only face volatility but also turn it into advantage. For example if one sees the last five years, which has caused a lot of heartburn for investors, the market is down by 2 percent from January 2008 to January 2013. Therefore, those investors who invested through systematic investment plan (SIP) have made significant return, in fact some of the examples we can see here are HDFC Equity, which has given 15 percent return, Canara Robeco Equity fund has given 15 percent return. There are in fact a number of funds that have given a return of ranging between 10-20 percent. So, it is important for investor not to get carried away when they see market rising, not to behave irrationally. The important point to remember is, do not look at it as a great opportunity to make quick buck, and also do not look at it as a missed opportunity.