Why Mutual Fund Investors Should Not Worry About Market High. But...

Mar 22, 2017

The Indian equity market is on a happy-high.

Investors are rejoicing BJP's sweeping victory in the UP polls - which was pegged as a mini-referendum on Prime Minister Modi, especially after the demonetisation. In other 4 states that went to polls in 2017 too, the BJP was successful in forming the Government. In Punjab, however, the Congress was victorious.

So, the mood is clearly euphoric. It's party time on Dalal Street, with champagne doing the rounds.

But watch your step before you slip on some spilled champagne...

Valuations have bloated with Indian equities scaling a new high. The price-to-earnings (P/E) of the S&P SBE Sensex has moved up nearly 22 times beginning in March 2017 from around 20 times since the new year. Similarly, the P/E of the S&P BSE Midcap index has jumped to nearly 30x from 26x at the start of the year.

With the market moving in the grossly overvalued zone, any information or data that does not paint an optimistic outlook, may lead the market to slip from its current position.

So, watch your step, hold on to your senses.

The investment strategy to follow...

Please note, if corporate earnings don't improve, investors may stop paying a higher price. The impact of corporate earnings on the fund's performance can be seen, depending on the characteristics of the mutual fund scheme's overall portfolio. Thus, be cautious of the traps of bull market. Don't be swayed by the forward statement in the earnings. Sadly, the oldest trick in the book of 'estimating earnings' played out is that, the near-term estimates are being toned down, while the future-earning estimates are increased. But you should not be incumbent on hopes and look out for structural shifts that can walk the growth trajectory.

While you invest in mutual fund stagger your investments. It is pointless going gung-ho, or getting swayed by the exuberance and investing all your investible surplus.

Naive investors should prefer the Systematic Investment Plan (SIPs) and/or Systematic Transfer Plan (STP) mode of investing. Systematic Investment Plan (SIP), enforce a sense of discipline while you aim to achieve the long-term financial goals of life, viz. buying a dream home, a car, saving for children's future, planning a foreign vacation with family, and even your own retirement. SIP work like a piggy-bank for you, compounding your wealth better while mitigating the risk involved on account of the volatility.

But when you select funds, be cautious. Choose those that follow robust investment processes and systems, instead of those indulging in momentum games. In current times, where market valuations seem stretched, largecap funds, balanced funds, and or value-style funds can be a suitable. Stay away from microcap, smallcap, and midcap funds for now. But ensure that you have an investment horizon of 3 - 5 years and a high-risk appetite. Choose mutual fund schemes in the category that have proven their mettle, so as to have only the consistent ones in your mutual fund portfolio.

As a fund manager is managing your money, knowing her/his experience in fund management and her/his investment style is valuable information. The fortune of the fund will be closely linked to the prudence with which he/she manages; and mind you, this is a function of the experience he/she carries in the field of fund management and equity research. But sound investment processes and systems are paramount.

To select winning mutual funds and achieve your financial goals, don't hesitate to avail the services of SEBI registered investment advisor or Certified Financial Guardian, who can handhold you in the journey of wealth creation. Remember, every investor needs a Financial Guardian who stands as symbol of Trust and Respect.

Mutual funds are an effective investment avenue for long-term wealth creation and to achieve financial goals. But PersonalFN believes, your investment discipline and asset allocation will decide your success in investing. Therefore, continue to invest in equity if your risk appetite and asset allocation permits, but adopt a sensible approach. The key is to keep investing and not be influenced by any short-term market views.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.