Markets at a lifetime high, what should be the mutual fund strategy?

Sensex at sixty thousand

BSE Sensex mounted to 60,000 points last week, and NIFTY is eager to touch 18,000 levels. These are exciting times for investors but also confuse some who are trying to justify the highs. These heights look scary, especially amid the market uncertainties from global markets, the US and China markets. It is obvious to ponder how one should manage the investment portfolio? In other words, what should be the mutual fund strategy from here? But, of course, the question is equally valid for stocks as well.

A preface

The broader market has doubled since the lows of last year. And the market momentum has picked up significantly. In other words, Sensex took about 160 trading sessions to climb 10,000 points and cross 60,000 levels. While the immediately preceding 10,000 points climb took over 400 trading sessions.

A constant overhang of a correction lingers, and few market observers strongly believe indices should correct. But, despite that, the market seems to remain bullish. There are multiple reasons for the confidence that market participants have demonstrated.

Given the high vaccination rate, the first reason is the diminishing chances of a third wave of the Covid-19 pandemic. The hope of economic recovery and broad-based participation in that regaining process is the second big reason for cheerfulness. In other words, given the positives, the current level of indices is just a number and, one could imagine Indian indices to breach new levels. The journey may not be free of hiccups, but the trajectory seems north.

The attraction to the market increases with newer heights. Consequently, participation also increases and making this an interrelated consequence. Further, a flurry of new funds gets launched during the bullish times. It is similar to the launch of dozens of IPOs when markets are growing.

Personal financial goals more critical than any market milestones

Financial planning is all about determining the purposes and making plans to achieve them through an investment strategy. For a mutual fund investor, being able to achieve a financial goal is of utmost significance. Of course, the performance of broader markets is to cherish the mood. Still, it is just a piece of information, and these market milestones should not matter.

The investment strategy is long term, and one must never try to time the market. Honestly, no one can ever time the market, so any effort in this direction is a wasteful exercise. Therefore, it is just enough to be aware of the temperament of indices and nothing more. The focus should be razor-sharp, and that should be on meeting personal objectives.

We genuinely believe in the long-term India growth story. Therefore, we are convinced about equity as a long-term investment option. Of course, investors must continue with their equity investments as per the plan. However, do not restate your goals assuming the temporarily high returns as average returns. Eventually, the returns will average over time, and any plan built on unrealistic assumptions will fail.

Portfolio rebalancing

Given the growth in market value, especially equities, there could be a need to conduct a tactical rebalance of the portfolio. For instance, assume you wanted to split investments into equity and debt in the ratio of 60%:40%. However, in the last 6-months, equities have grown 25% while debt increased 5%.

Rs10,000 gets invested at the start of the year in the desired proportion, i.e. Rs 6,000 in equity and Rs 4,000 in debt. Equity value grew to Rs 7,500 while debt has increased to Rs 4,200. Now the equity to debt split is 64%:36%. There is a need to reduce equity exposure in line with your target and hence rebalance the portfolio. This action could mean partial profit booking as a result of rebalancing.

Should you stop your SIPs?

Any investing action has two steps – buying and selling. First, we must invest after a thorough analysis and deliberation. Therefore, we put significant emphasis on what to buy, when to buy, etc. However, most investors conveniently ignore the second equal half of the transaction. In other words, investors often do not deliberate on when to sell or stop a SIP. The closure is an equally important aspect of any financial planning exercise, and one must know when to exit.

Investment through SIPs are subject to volatility, and therefore returns vary throughout the investment tenure. Thus, the answer on whether to continue or discontinue SIP lies in the term of the SIP.

Suppose the investment is for a specific goal, and the timeline is nearby (say 12-15 months from now). In that case, prudence suggests taking advantage of recent highs. However, given the market level, leaving the investment to market moods for the balance duration can be detrimental. For example, suppose the market falls closer to the goal maturity. Then, there will be little or no time left to buck up and gain the loss in value.

However, if the target is still away and you have about 3-5 years or more left, the best is to let the SIP continue. In that case, the current market valuation is irrelevant.

Can you sell now and buy later when the market falls? Yes, technically, you can.

But, isn’t the idea of investing in mutual funds through SIP not to time the market?

By any such action, you defy the whole logic. And, remember, there is no merit in trying to time the market as that is impossible. Does anyone know how the market will behave next? The market may continue the upward journey, fall now, take some time before it downtrends or remain flat.

Also, if the market corrects after you sell, you would never know how much the market will fall. So when to put the money back? Further, there is tax implication on selling the investments. You lose a portion of the value in taxes every time you book profit on the sale of your assets.

In conclusion, whether you should continue SIP or not should be decided based on your financial goals and time up to the destination. Over a long time, these highs, lows, volatility, etc., will phase off, and your purchase cost will average across various points. Remember, even during highs, there will be points of the purchase at intermittent dips. So, there is no need for a knee jerk reaction by looking at the recent gains unless there is a goal that matures soon.

Should you invest in SIP now?

It again depends on the goal. If the objective is long-term capital appreciation, there is no harm in beginning the investment even at these levels. And, in those cases, one must remain patient with the SIPs.

Balanced Advantage Funds (BAFs) – a category worth considering

The Balanced Advantage Funds (BAF) and Dynamic Asset Allocation Funds are mutual funds that operate on a hybrid model. These funds manage their equity and debt exposure according to the market conditions and their reading of the situation.

These funds invest in companies across the market cap and hence enjoy the desired flexibility. And, since their investment portfolio is a mix of equity and debt, investors averse to total equity exposure may explore them as an option. In addition, investment in debt acts as a cushion during volatility in the equity market. It lends the fund an alternative investment option during times of high equity valuations. However, bear in mind, these funds do not provide complete safety and capital preservation as a chunk of investment gets done in the equities asset class.

Each mutual fund house uses a proprietary model to base its investment decisions. Several factors like market P/E, volatility, volumes, etc., are evaluated in the process.

Here are some of the best performing BAF schemes during recent times:

Scheme Name 1-year returns (%) 2-year returns (%)
HDFC Balanced Advantage Fund – D (G) 59.3% 18.6%
Aditya Birla BAF – Direct (G) 36.7% 18.0%
Nippon BAF – Direct (G) 34.3% 17.0%
ICICI Pru BAF – Direct (G) 32.7% 15.6%

Source: as of 28th September 2021

Point to note; investors must remain cautious of the new fund launches and carefully assess their participation. You do not want to get stuck with the wrong choice at these market levels.

The bottom line – what should be the mutual fund strategy?

Investors should remain focused on their portfolios and progress towards their individual goals. Eventually, it is the portfolio performance that matters and not the broader market.

Rebalancing is necessary to maintain the right level of exposure to an asset class. This step is a natural hedge and will manage exposure to different asset classes according to the target allocation. Further, if you are amongst those who made a plan at a granular level, check the exposure to small and mid-cap mutual funds within the broader equities space. There is probably a need to rebalance there as well.

Few investors hold just too many mutual fund schemes with overlapping investment objectives. For instance, an investor may have three different blue-chip funds. That is not diversification, as it is just an overlap of the same securities through various funds. So it may be the right time to reduce the overlap and trim down the number of mutual fund schemes.

Also, remember, the market at all-time highs does not necessarily mean that markets will correct. The market may continue to rise from here, so investors must learn to ignore the noise. The equity markets may invariably go north over the long term. Like who would have imagined Nifty at 10K when it was 4K? Similarly, did you imagine Nifty to be 18K when it was 10K?

In conclusion, an investor will make money when invested in the market. There could be intermittent jolts, but the point is valid over a period. The point is not to sell and exit; the point is to think long and remain invested.

About the author

The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. Through his writing, the author wants to share his knowledge and understanding of the subject.

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The author has used his knowledge, experience, and understanding of the subject and has exercised extreme caution to avoid possible mistakes. However, the author does not take any responsibility for any error that exists.

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