Don’t Let Mar­ket’s Dizzy Heights Dis­rupt Your In­vest­ment Process

Dalal Street Investment Journal - - EXPERT SPEAK - He­mant Rustagi

In­dia’s bench­mark Nifty con­quered the 10,000-mark for the first time ever in the month of July. The Sen­sex also hit a his­toric peak of 32,300 level. The mar­kets have been per­form­ing ex­tremely well since the pre­sen­ta­tion of the Union bud­get 2017 in the par­lia­ment. So far this year, the Sen­sex and Nifty have gained around 21 per cent and 22 per cent, re­spec­tively. How­ever, the ques­tion on most in­vestors’ mind is whether there is a need to ex­er­cise some cau­tion at these lev­els. While such dizzy heights in the mar­ket usu­ally breed a mixed feel­ing of eupho­ria and skep­ti­cism among in­vestors, there are fac­tors such as steps be­ing taken by the gov­ern­ment for in­tro­duc­ing re­forms and low­er­ing in­fla­tion, strong domestic in­flows and low oil prices that are mak­ing the mar­ket par­tic­i­pants con­fi­dent about con­tin­u­a­tion of the rally even as valu­a­tions re­main high.

If you are in the midst of your in­vest­ment process or are look­ing to ini­ti­ate it now, you must not al­low such dilem­mas to dis­rupt your thought process as the key to sus­tained in­vest­ment suc­cess is to con­tinue your in­vest­ment process un-in­ter­rupt­edly through dif­fer­ent moods of the mar­ket. How­ever, to be able to do so, you need to in­ter­pret the per­ceived risk and re­ward prop­erly and un­der­stand the im­por­tance of cre­at­ing the right bal­ance be­tween these two im­por­tant ele­ments of your in­vest­ment process.

IS IT THE TIME TO EXIT?

There are two key de­ci­sions to be made for your in­vest­ments. The first is, when to buy, and the sec­ond is, when to sell. Ob­vi­ously, the dif­fi­cult one is to know when to sell. How­ever, if you fol­low an as­set al­lo­ca­tion model and stay com­mit­ted to your time hori­zon, you won’t face this dilemma of what to do with your in­vest­ments dur­ing the pe­ri­ods when the mar­kets do very well and when they don’t. For ex­am­ple, if you are in­vest­ing through SIP to build a cor­pus for your re­tire­ment that is, say, 15 years away, there is no need for you to give un­due im­por­tance to mar­ket’s highs and lows as you are still in the midst of your in­vest­ment process.

Re­mem­ber, your time hori­zon be­gins when you in­vest and ends when you need to take the money out. The length of time you re­main in­vested is im­por­tant be­cause it can di­rectly af­fect your abil­ity to re­duce risk. Longer time hori­zons al­low you to take on greater risks, with a greater po­ten­tial to earn bet­ter re­turns, as some of those risks can be re­duced by in­vest­ing across dif­fer­ent mar­ket en­vi­ron­ments.

WILL IT BE RIGHT TO START IN­VEST­ING NOW?

If you are one of those in­vestors who have been wait­ing on the side­lines for a cor­rec­tion in the mar­ket to start your in­vest­ment process, the de­ci­sion-mak­ing can be a bit tricky. It is a well-known fact that even ex­perts find it dif­fi­cult to pre­dict short term move­ments in the mar­kets. Hence, it may be a fu­tile ex­er­cise to keep wait­ing for that cor­rec­tion. How­ever, con­sid­er­ing that volatil­ity is a nat­u­ral phe­nom­e­non in the stock mar­ket, the right way to pro­ceed would be to in­vest for the long-term in a dis­ci­plined man­ner. It is equally im­por­tant to choose your funds well, as these would take care of most of your wor­ries in fu­ture. First, you must en­sure that your in­vest­ment ob­jec­tives match with that of the funds you in­tend to in­vest in. Sec­ond, you must have a close look at the fund’s in­vest­ment phi­los­o­phy as it would help you un­der­stand the fund man­ager’s ap­proach to stock se­lec­tion, risk as­sump­tion and the an­tic­i­pated level of port­fo­lio turnover. Third, keep an eye on the level of di­ver­si­fi­ca­tion in the port­fo­lio of the fund. Although mu­tual funds are di­ver­si­fied by na­ture, there are funds that fol­low a strat­egy of tak­ing con­cen­trated bets. The choice be­tween a di­ver­si­fied and a con­cen­trated port­fo­lio will largely de­pend upon your risk pro­file. Re­mem­ber, a well-di­ver­si­fied port­fo­lio en­ables you to spread your in­vest­ments across dif­fer­ent sec­tors and mar­ket seg­ments.

Last, but not the least, a fund’s long-term per­for­mance track record has to be given its due in the se­lec­tion process. How­ever, it is crit­i­cal that you keep per­for­mance in proper per­spec­tive.

The right way to an­a­lyze per­for­mance is to com­pare it with the peer group as well as its bench­mark. Also, look for con­sis­tency in per­for­mance and avoid funds that show high re­turns in the past, but are in­con­sis­tent over dif­fer­ent time pe­ri­ods.

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