Mutual fund investing is all about ascertaining your goals and setting out to reach them.
Amid ballooning crude oil prices and weakening Indian rupee value vs the US dollar, the market has been witnessing continuous downfall since the past few weeks. Moreover, RBI's recent decision to keep the repo rate unchanged saw domestic markets plunging further, leaving most investors sceptical and worried about their current investments.
Sensex is hovering around 34500 and Nifty around 10500 from it all time high which, a few weeks ago, had crossed around 38500 and 11500. In the current market, one should remain cautious while investing.
How to go about investing in the current market situation?
When one thinks about mutual fund investments, it becomes difficult to make a choice as to whether which is a better mode of investment - SIP or lump sum. Even though SIPs are preferred mode, investors often choose to initiate lump-sum investments in particular circumstances.
Manish Kothari, Director & Head of Mutual Funds, Paisabazaar.com told Moneycontrol that during such volatile market scenario, it's not advisable for investors, whether existing or new, to invest lump-sum in mutual funds, since it necessitates timing the market well. “Investors must consider investing through the SIP route, to benefit from rupee cost averaging and avoid the risk of timing the market, irrespective of the market's ups and downs,” he said
Risk tolerance also determines your mode of investment. High-risk investments like equity funds are able to deliver better returns through SIPs than a lump sum.
“In case you have received a huge chunk of money due to the sale of property or upon retirement, you may park the lump sum in a low-risk debt fund for an intermediate horizon. Eventually, you may initiate a Systematic Transfer Plan (STP) from the debt fund to the equity fund,” said Archit Gupta, Founder & CEO ClearTax.
However, to generate good returns in future you should ideally follow these 5 strategies, which are:
Keep the investment objective in mind
Never lose sight of why you are investing in the first place. Ajit Narasimhan, Chief Marketing Officer, Sundaram Mutual pointed out that one may be investing in the market to fund one’s retirement. Short term drawdowns like these then should not hinder you from investing! “A clear investment objective helps us become more disciplined as an investor and not get swayed by short term gyrations in the market,” Narasimhan told Moneycontrol.
Know your time horizon
This flows from the earlier point. The investment objective will define what time can be spent to reach respective goals and these horizons can be split into multiple buckets. Knowing your time horizon would again help us stay on the path without panicking in short term corrections as well as properly assess our risk appetite.
Do proper goal-based investing
Mutual fund investing is all about ascertaining your goals and setting out to reach them. The investor would have multiple goals like a wedding, son/daughter education, retirement and the like to plan for. Bucketing different goals would help an investor stay on course.
“A near-term goal like creating an emergency fund where your priority is to maintain liquidity & safety of capital over an investment horizon of 6 months to 1 year may call for a lump sum. Similarly, if you wish to invest in short-term debt funds like liquid funds, you may think of lump sum investments,” said Gupta.
Always stick to asset allocation
Asset allocation defines a major chunk of an investor’s return and should not be ignored. Narasimhan said that very often in turbulent times like these, the investors miss the wood for the trees and start micro analyzing which stocks a fund holds and so forth. This doesn’t really matter in the long run. “What matters is whether the investor – based on his goals and risk appetite, properly allocates his portfolio between equity and debt and again, within those asset classes – suitable buckets,” he said.
For instance, a 35 year old executive would typically be having 65-70% of his assets in equity with a decent mix of large, mid and thematic funds and the rest in debt. If he is investing at a ration of 50:50 – it shows he is underweight. Similarly, if a retired person has 65% sitting in equity, it would be asking for trouble, given his goals would be better served with a capital protection from debt.
Spread your riskLump sum investment involves putting chunks of money at risk all at once. So, it is advisable to diversify your investments across fund houses and fund categories. “While going for a lump sum investment, timing is of the essence. If you want to invest in a top-performing fund whose Net Asset Value is at peak, then you need to pause for a while before the fund attains its right value. Never commit the mistake of buying high & sell low while doing lump sum investment,” said Gupta.