How to Enter Equity Mutual Funds at 32K Levels
Equity benchmark Sensex, on 25th July, touched a new all-time high of 32,374 in intraday trade, amid wide cheers from the trading fraternity and investors. Nifty too closed at a lifetime high of 9,964 on the same day. Since equity mutual funds directly invest in shares, and with the market at its peak, confusion among investors has started to creep in. While some believe that the bull run has finally begun, others fear that a crash may just be round the corner. So, is there a way to enter equity mutual funds investments at 32K levels?
Yes, with such circumstances prevailing, here’s what you should be doing with your equity mutual fund investments.
Ignore absolute numbers for equity mutual funds investments
Absolute numbers don’t convey much – 1 lakh today is not equivalent to its purchasing power ten years back – courtesy inflation. Valuations of an equity mutual fund, or an individual stock, should be compared to their earnings potential. Earnings have moved up in the last three years, and the valuation of a stock may have fallen in this period. Market analysts are expecting a jump in the 2017-18 corporate earnings over 2016-17. Nifty companies are expecting a 19-20% growth in earnings, mainly due to a low base effect. The 2018-19 earnings are pegged at 16%. However, as an investor looking to enter equity mutual funds investments at 32K levels, expect moderate returns to be on the safe side. This is because of the forward price-to-earnings (PE) ratio, at 18 times, is higher than its historical average. It means a major part of the expected EPS growth is already factored in the stock valuation.
Retain your asset allocation
While equity valuations are admittedly high compared to their historical average, with expected returns less, it’s advisable not to reduce your equity exposure. Notwithstanding the rally, equities would remain attractive over bonds and are expected to outperform the latter if you have a long-term horizon. Bonds, gold, and property are not attractive at 32k index levels.
Continue regular investing
Since there’s no reason to alter your asset allocation, it’s advisable that you continue with your regular investments in core equity schemes via the systematic investment plan (SIP) mode. Periodic and disciplined investments will help you tide over short-term volatility. Investors having a medium to long-term outlook will benefit the most through SIPs as that will help them to average the cost of holding.
Stagger lump sum investments
Invest in instalments if you have a lump sum amount at your disposal. Put the entire amount in a liquid fund, ultra short term bond fund or even an arbitrage fund and auto switch a fixed amount every month to your equity mutual fund. Such a strategy will serve two benefits. While you park the money in a mutual fund to yield handsome returns over the long-term, your holding fund generates a return over and above your savings bank account interest on the balance amount. Besides, staggered investments will help you to buy at lower levels. Hold your funds to buy on dips.
Avoid mid caps
The mid-cap segment, at current levels, is overvalued. There are not many stocks that are fairly priced. If you are holding small and mid cap schemes, it is advisable to switch to a large-cap fund. Remember, stocks should be valued on fundamental factors like management and financial performance. In the case of any market downturn, a large-cap fund will stand a much better chance of recovery than a small-cap fund.
Never panic during a correction
Many people investing for the first time, especially those who have invested a significant sum during a bull phase, liquidate their investments during a market correction. Similarly, those investing in equity mutual funds investments via SIPs often stop them fearing more losses. Such a decision would undeniably jeopardise your financial goals. Treat market corrections as an opportunity to buy more units of a mutual fund, instead of getting paranoid over the future of your investments. An equity market correction allows you to top up your investments and you can take the full benefit of rupee-cost averaging.