IT’S TIME TO MAKE A MOVE

The stock market has been doing well and it appears that we are in the midst of a multi-year bull run. Needless to say, there are going to be periods of increased volatility from time to time and hence investors must be prepared to tackle them in a disciplined manner so as to benefit from the long-term potential of the stock market. The disappointing part of this great run in the market has been the low participation of retail investors. It is quite evident that individual investors are facing the dilemma of what to do in the current market conditions.

If one were to analyse the reasons for low retail participation, the perception of equity as a risky asset class in the eyes of investors would top the list. No wonder equity fund investors have been redeeming their holdings over the last one year or so. Even those who have remained invested are wondering whether they should exit now or allow the portfolio to ride on. Then there are investors who want to invest but are not sure whether to invest as a lump sum or systematically. These are typical dilemmas that investors face whenever the stock market starts doing well. It happens mainly because investors generally remain skeptical about the prospects of the stock market. That’s why, despite the best efforts of experts to make investors aware of the benefits of investing in equities, the participation from retail investors has remained low. More often than not, equities fail to find a place in most investors’ asset allocation process. 

It’s time for investors to have a close look at their current asset allocation and ensure that they are not under-invested in equities. Of course, the key to success is to invest in different asset classes depending upon one’s risk profile and time horizon. Even those who have remained invested must control their urge to exit every time the market turns volatile. They need to keep their focus on their investment goals and the remaining time horizon as it will go a long way in allowing them to tackle the volatility well.  

For investors who indeed have valid reasons for booking profits, there should a strategy in place to do so. If the intent is to book profits periodically to generate some income, the right way would be to opt for a dividend payout option. This will not only ensure periodical profit booking but also provide an opportunity to rebalance the portfolio without any tax implications. For those who may want to redeem a part of the holdings to reduce exposure to equities, rebalancing the portfolio on a yearly basis would be an ideal way to bring the asset allocation closer to the original level. In fact, it works very well even in a falling market as rebalancing ensures entry at lower levels. It is important to know that any attempt to book profit with an intention to reinvest at lower levels is nothing but trying to time the market and that does not work most of the times.

For those who are facing the dilemma of whether to invest a lump sum or systematically, the key deciding factor should be whether it is likely to be a one-off investment or does one have the capacity to invest systematically too. If one is looking to make a one-off investment, the prudent thing to do would be to invest 50 per cent of the money as a lump sum now and the rest through a Systematic Transfer Plan (STP) over the next six months or so. Remember, by prolonging your investment period for long, you would end up reducing your holding period. 

Through STP one can transfer a fixed sum at a pre-determined interval from a liquid or a floating rate fund to an equity fund of the same mutual fund. The best thing about STP is that it allows an investor to enter into the equity market in a disciplined manner and that reduces the risk that one takes while trying to time the market by investing a lump sum amount. This way, if the market drops, one would suffer a smaller loss and can buy more units at the lower prices through systematic investing.

However, for someone who doesn’t have a lump sum amount, systematic investing remains the best bet for investing in equity funds. Ideally, it should be a combination of lump sum and systematic investment. Therefore, one must remain committed to invest some amount as lump sum whenever it is available for allocation to a long-term portfolio.