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How to invest in Mutual Funds when the market is high

From the sell-off frenzy in March to lifetime highs, markets have been nothing short of a rollercoaster ride in 2020. The current rally in the Indian markets has been largely fueled by positive news flow on the vaccine, Q2 results largely meeting expectations, high liquidity, and record foreign inflows. When the market rises relentlessly, everyone wants to be part of the bull run. However, it is quite a puzzle for most mutual fund investors as to whether to sell off their investments or to continue holding them amid such highs. Investors are also confused if and where they should invest their money at peak levels.

What should mutual fund investors do?

In this backdrop, it is normal to want to participate in the market euphoria in some way. However, it is important for mutual fund investors to understand that they should pay attention to their financial goals rather than market conditions, as the latter will always fluctuate. If one’s goal is short-term, say a year away, it may be a good time to book profits if the goal is met. However, booking profits every time the market trades high may not be ideal for investors with long-term goals. Further, if one is invested in equity mutual funds, it should be borne in mind that these are for the long term, that is, at least 5 years.

Time to review and rebalance portfolio

Bull runs are a great time for investors to review and rebalance their portfolio from the asset allocation perspective. Focus on maintaining the optimal balance across assets. When stock markets are high, portfolios may get skewed more towards equity. Hence, now would be a good time to bring back the balance. If one is overweight in equities vis-a-vis their comfort zone, it is a good opportunity to adjust your overall asset allocation so that it is line with your financial goals and risk profile.

Get rid of weak performers

Such times also present an opportunity to get rid of underperforming funds. However, caution must be exercised while identifying truly underperforming schemes; for example, short-term underperformance seen in isolation or focusing only on recent outperformers may result in selling off of a good fund. Also check if the fund one is exiting is a value addition to one’s portfolio from the perspective of diversification. It is also wise to check for any applicable exit loads or tax implications, which may eventually reduce net returns.

SIP is all-weather

For those investing in mutual funds through the systematic investment plan (SIP) route, market highs should mean “business as usual” just as in the case of market lows. This is because it is the very purpose of an SIP to shield one from market extremes. Because one invests the same amount regularly in an SIP, one tends to get more units of the fund amid a downfall in the NAV and vice versa. Thus, one stands to gain more when the market rises. SIP investment thus eliminates the hassle of timing the markets. SIP investors may, therefore, continue with their investments.

Overall, if we look at mutual fund investments from a broader perspective, these investments are typically designed for specific goals and for long-term wealth creation. Therefore, periodic market highs should only be seen as milestones and not the destination. An investor seeking to create a generous corpus will focus on his/her goals and stay invested regardless of market ups and downs. In addition, there is no right time to start investing as in the long run, short-term fluctuations hardly matter. Timing the market for a few percentage points may cost one the opportunity to participate in long-term wealth creation. If one wishes to enter the market at its peak, SIP can be a smart strategy as it allows one to spread investments over a period of time.

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