Your portfolio value may be at an all-time high, as Nifty scales mount 16K – a staggering 113 percent gain from the low of 7511 registered on March 24, 2020. For long-term equity mutual fund investors, this must be one of the most rewarding periods. Though it is comforting to invest in equity mutual funds in the context of past returns, the changing macroeconomic scenario makes the investment decision a difficult one. Here is financial planners’ advice to those contemplating about investing in equities now.
Set expectations right
Though equity funds and indices have rewarded most investors, making money is going to be a tough task from now on. The liquidity injected by central bankers have lifted all stocks in many parts of the world and India is no different. Valuations have gone up, as investors chased risky assets such as stocks in search of high returns. The price- to-book-value multiple of Nifty 50 stands at 4.15 times, compared to 3.76 times as on January 1, 2020. If you have been tracking the Nifty for a long time, then you may remember that the narrow markets of 2019 pushed Nifty up with pricey valuations.
Many stocks are priced to perfection, and there are risks investors cannot ignore. Developed countries including the US are experiencing the third wave of COVID-19 infections. Further spread of the COVID-19 in India may lead to restrictions on movement and economic activities, which can slow down the economy and the earnings growth. A large segment of Indian population is yet to get vaccinated. Rising inflation and a possible hike in interest rates won’t augur well for the stock markets. A Patchy monsoon and uneven distribution of rains are other concerns. Investors have to be measured with their investments in equities.
“Timing the market based on market level may not work for many investors. It is better to pay heed to asset allocation requirements,” says Vishal Dhawan, Founder and Chief Financial Planner, Plan Ahead Wealth Advisors.
Should you remain invested or sell?
Markets may remain volatile in short term, though in the long term they are likely to go up in a growing economy like India. Hence you need a compass to stay course. Suresh Sadagopan, founder of Ladder 7 Financial Advisories says, “Your asset allocation based on your financial goals should guide your exposure to equities and not the stock market levels.”
It saves you from knee jerk reactions to the market movements. If you have started your investments with a 60 percent allocation to stocks and now that allocation has gone up to 95 percent then you are overinvested in equities. “If your current allocation to equities is far above the original asset allocation you started with, then you should take some money off the table and invest in other asset classes in line with your original asset allocation,” says Sadagopan. Rebalancing your asset allocation in a disciplined manner helps book profits and stay on the path to your financial goals.
If you are far away from your financial goals (more than five years), then you should ideally continue with your systematic investment plans (SIP) into equity funds. “Index funds and flexicap funds can be used to initiate SIP if you are underinvested in equities. If you do not have access to advice you can consider investments in dynamic asset allocation funds,” says Dhawan. Flexicap funds have given 13.74 percent returns over five year ended July 30, 2021, as per Value Research. Dynamic asset allocation funds, also known as balanced advantage funds allocate money to stocks and bonds depending on their relative attractiveness. Over last five years, these funds have given 8.65 percent.
If you are close to your financial goals then you can also consider gradual shift from equity funds to bond funds using a systematic transfer plan. Do not get swayed by the performance of the stock markets. If you have money kept aside for some financial goal due in next year or two, do not plough back that money into equities. Equities can be volatile in short term.
Should you start investing now?
There is never a bad time to start investing in equities. However, you have to be disciplined in your approach. Just because others are making money, there is no urgency to jump in with all your money. Do make a financial plan for yourself, and seek expert help if required.
SIP in diversified flexicap funds can be a good starting point if you have minimum five years’ time-frame. If you have a large sum of money and want to invest in it, in equity funds, then go through systematic transfer plan (STP). Park the money in overnight or liquid fund and instruct transfer it in equity funds using an STP at regular interval – say daily or weekly.
“If you are first time investor in equities and have no access to an advisor, then you can start with systematic investment plans in asset allocation products, including dynamic asset allocation funds,” says Sadagopan.
There are many new fund offers being launched by fund houses. Do not chase them. Avoid getting into thematic and sector funds. Small cap funds have given 105 percent returns over the last one year as a category. However, they are risky bets. “Though small cap funds are likely to deliver higher returns in long term than flexicap and large cap funds, they also suffer much steeper downsides and prolonged periods of sideways moves,” says Amol Joshi, founder of Plan Rupee Investment Services. He advises beginners against investing in small cap funds. “Only mature investors should consider investing in small cap funds, provided they have a long enough holding period and the ability to add on to their investments at regular intervals,” he adds.
Instead of getting into focused portfolios and thematic offerings, it is time to stay diversified. Geographical diversification in equities is a must, to benefit from global growth and contain country specific risk. “Irrespective of the level of domestic equities, keep at least 10 to 20 percent of your money in overseas equities. Start with index funds and gradually build you allocation,” says Dhawan.