Over the last three months, the stock market has been touching new highs regularly. Such an astonishing bull run is now bringing cheers in those investors who had been stopped checking on their equity fund portfolio many years ago. While logging on now there would be waiting a big surprise for them that the recent surge in stock prices has showed how quickly and dramatically even a short-term stock rally can transform their big returns on their equity funds. On the flip side, many people being first- timers are complaining that stock market is going up with each passing day to touch new highs and how they can ride the current wave of stock markets without getting caught in the perfect storms in the future. They ironically intend to enter the stock market when they are at a high and exit when stock market starts correcting or, for that matter, tumbling. That’s really a pity on those investors who end up playing a small or even no role in the kind of accumulations as they need to meet their future needs. Every savvy investor need to remember that success of his investments lies in achieving his desired outcomes for his future needs, be it kids’ higher education abroad or a care-free retirement. Since every equity fund portfolio is in the green, shouldn’t one just sell them while the going is good that seems to be the top-of-mind question for many investors? On the other side, new-entrants are getting lure with a rising stock market; they are, now seeking the safe way to hit the hot iron. This article would address on these burning issues and avoid some of the common traps.
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Make a Start Right
Ironically, we use to take the short-term route through stocks and mutual funds but our long-term savings is locked away in PPF, EPF and even FDs. As in the past, the first time investors are always undergone with danger of unrealistic expectations, following the herd, and making uninformed choices and premature exits in a short while the market heads south. Delhi-based Amit Goel, 38 a production manager might have a thing or two to say on this. In the beginning of 2007, Goel was planning to buy his first home after a year and he was short on funds of Rs1 lakh for the down payment. With equity markets on a high as it is now, Goel’s friend suggested that he should invest in equity mutual funds for a year and making use the huge returns to meet his down payment. He invested Rs3 lakh in one go in a couple of mutual fund schemes. But the market went horribly wrong. Global markets melt down taking Indian equity markets along. He lost Rs1.05 lakh around 35 percent of his portfolio. The end result: he had to postpone his home buying for three years.
While learning Goel’s experience for new investors, one of the best ways to get started is to invest small amounts regularly though systematic investment plans (SIPs) irrespective of the market is headed in either way. SIPs allow the investor to capture the ups and downs of the stock market and help ride various market turmoil conditions as well as collect more number of units at lower net asset value (NAV). Like Amit, if you have lump sum amount to invest, you could park your money in a low-risk debt fund and invest in an equity scheme from the same fund house over time through as systematic transfer plan (STP). You could also consider additional investment on your SIP at every correction in the stock market.
Early Exit, Early Losses
There would be many first-time investors who would want to invest in current rally through mutual funds route and get quick gains. Remember, the place for quick gains is a casino and not the stock market. You need to be realistic as the higher the risk you take, greater are the chances of higher return subject to sharp downturns in the short run. Before investing, be clear about your risk-bearing capacity and the returns that you expect. You should not make premature withdrawal when the stock market sharply corrects after having invested in the market while it was at a high. Because of, if the run continues, you will still exit exulting at any gains you make. You would lose out in both situations. Hence, the stock market is an ideal place for creating long-term wealth by making well-considered investments, riding out the volatility in the shorter-term. That said, one should have been better off staying invested for the long term, ideally 8-10 years or more that you can get the best from market.
Resist Early Booking Profits
In the bull run, many investors who have been frustrated by the do-nothing market of the last six years in dilemma to book or not to book profits. Ideally, you should not be in hurry to ‘book profits’ on all your equity funds just because their returns appear so good. Take profits only if you are within a year or two of the financial goals for which you have invested. If you have not invested in equities in the last five years or have stopped your systematic investment plans, do resume them. So, while this a good time to invest in equity funds with a five year perspective, don’t plunge into funds invested in the hot themes or sizzling sectors simply in the hope of making a quick buck. If you would like to invest now, choose funds and themes which are undervalued, rather than those which have topped the charts in the past. That said, choosing the right scheme is not easy, as there are hundreds of mutual fund schemes in the market, you need to take a good look at the consistent performance either yourself or through a trusted investment advisor.
Don’t be lulled into a false sense of security by being part of a large crowd. It might be heading for hell. You need to ride on investments whose stars are on the rise thanks to their promising fundamentals. Don’t get influenced by marketing spiels and uninformed media reports that abound in the rising markets. There is no substitute for homework on financials, past track record and evaluation of prospects. If you can’t do it, take help of a qualified and registered investment advisor. Finally, you should realize that stocks and equity mutual funds schemes are high-risk instruments that can cost you not only returns, but even a large part of the principal. They are the route for creating long-term wealth and not short-cut to get rich quick.
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