Flashback to the 2007 market euphoria …

Business channel hosts are all smiles and it feels like it's Diwali, their studios all decorated. Media portrays the event as a big win for India.



Every few months, newspaper headlines announced the Sensex crossing a new milestone—16000, 18000, 20000! You had brokers jumping for joy, quotes from experts, and probably even your neighbourhood shopkeeper.
 

Sensex from 3,000 to 30,000: Where to from here?  
(Source: BSEIndia.com, PersonalFN Research)

Though it's been a while since then, you know how the journey has been. No one can forget the crash of 2008 (led by the US subprime mortgage crises), where even canny investors burnt their fingers and learnt a hard lesson on investing.

Today, once again the S&P BSE Sensex is touching 30,000, and the Nifty has crossed 9,200! The sentiments are equally high as mutual fund inflows continue to buoy the market. So, can the past possibly be forgotten?

"Be fearful when others are greedy and greedy when others are fearful" is a famous quote of legendary investor, Mr Warren Buffett.

But unfortunately, the behavioural bias remains the same as many endeavour to create wealth. Everybody wants to make a quick buck. It's human nature to find an easier (and exciting) way to make money, and that's why lottery, horseracing, or gambling in any form have been around for centuries. Over the years, the stock market too, has emerged from a more dignified form of gambling den (referred to the 'trading ring', to a sophisticated and superlative form, backed by technology and education).

As you may know, there is a well-known apocryphal anecdote involving famous businessman, John D. Rockefeller (Some have referred to the same anecdote with Joseph Kennedy, another high profile investor). In 1928, while having his shoes shined, the shoeshine boy apparently started giving him stock tips. This is when Rockefeller decided that it was time to get out of the market. As a result, he avoided the depression that followed in 1929 and continued to be the richest man in America.

Now as the market soars to new highs, what should you be doing? Take advice from a paanwala on Dalal Street?

Well, certainly not. You should be investing sensibly recognising your financial goals...

At a time where valuations seemed stretched, a staggered approach to investing is a prudent path to take. There's no point timing the market either. No one has derived much success from it. A trader is good only until his last trade; you don't know what's in store – good, bad, or ugly.

Remember, trading can be hazardous to your wealth and health. Hence, follow a sensible approach: invest as per your age, risk profile, financial health, investment horizon, financial goals, and draw an asset allocation that's most appropriate for you, rather than fretting about whether it is the right time to buy or sell.

While you invest in equities, prefer diversified equity mutual funds over sector/thematic funds for the host advantages they offer. But make sure you're selecting the best mutual fund schemes for your portfolio.

If you need unbiased research-backed guidance to select the best equity mutual fund schemes for your portfolio, don't miss to opt for PersonalFN's 'FundSelect' service. We will share with you 6 ultimate secrets to beating the market by a whopping 70%! It is the simplest and potentially the best way to grow your portfolio value significantly!

Don't fall for opinions asking you to invest aggressively as the market may hit newer highs, or even those asking you to sell and move to cash. Invest as per your financial plan that's been drawn up after evaluating aspects such as your age, risk profile, financial health, investment horizon, financial goals and so on. It's better to have your investment right than timing it wrong.

If you have a financial plan in place, stick to it. If not, you should invest as per your risk profile below:

High Risk

If you have age on your side, a steady source of income and financial goals that are five years or more away, you can invest in value funds, multi-cap funds, flexi-cap funds, and opportunities funds. These categories of funds will provide an adequate mix of stability and growth. Value funds and multi-cap funds invest in a mix of mid-cap and large-cap stocks, while flexi-cap and opportunities style funds hold a mandate to invest across market capitalisation and sectors. Even though mid- and small-cap funds are suitable for your profile, with valuations stretched, these funds pose a high downside risk. You should be cautious of the higher risk in these funds. It will be best to avoid this category of funds as of now.

Choose funds with an established record of delivering superior risk-adjusted returns.

Moderate-to-High Risk

If you have a moderate-to-high risk profile and an investment horizon of over five years, opt for large-cap funds or balanced funds. In times of high market volatility and chances of a market correction, large-cap funds and balanced funds are better equipped to withstand a selloff.

If you are new to the world of equities, then you should get started with balanced funds. About 65-70% of the assets are invested in equity, with the balance invested in debt. A combination of these asset classes offers a high level of diversification, hence, lowering the risk as compared to a pure equity fund.

For a newbie investor, a balanced fund can offer several benefits. You get the benefits of both worlds—equity and debt—in a single fund. Balanced funds have the potential to deliver inflation-beating returns, while keeping the risk in check.

Low Risk

If you have a low risk appetite and an investment horizon of less than five years, avoid equity-oriented funds altogether. You may find it hard to deal with the high market volatility. However, in order to earn a decent return on your investment, consider debt funds. If you have an investment horizon of over three years, you can consider short-term funds or dynamic bond funds. Considering interest rates have nearly bottomed, it is risky to invest in long-term debt funds now. However, if you do not mind the additional risk, you can invest up to 10%-15% of your investment in long-term debt funds with an investment horizon of at least three years.

If volatility is not your friend or if you have an investment horizon of less than three years, then liquid funds or ultra-short term funds (liquid plus funds) will be an apt choice. These funds will earn you returns in the range of 6-7% (pre-tax) with extreme low volatility.

To sum it up...

PersonalFN is of the view that, before putting money in equity mutual funds, you should be sure that you don't need that money for the next five years. Don't get carried away by the current market rally, which is getting stronger with every passing day.

Those who want to take exposure to equity markets now, should opt for Systematic Investment Plans (SIPs). Taking the SIP route enables you to average out your buying when markets drift down and compound your money when markets scale up.

PersonalFN believes investors should concentrate on getting their asset allocation right. There are benefits of investing as per your personalised asset allocation.

PersonalFN provides extensive advice on money matters and helps people plan finances for achieving their long-term goals. Sign up for our exclusive Comprehensive Financial Planning Service here. Through this service, our qualified financial planner will help you plan for financial goals such as house purchase, child education , child marriage, vacation, retirement etc. They will provide you unbiased recommendations backed by research experience of more than a decade.

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