3 Missteps Equity Mutual Fund Investors Should Avoid Right Now
Equities are meant for long-term investing, and it would seem that we're not quite at the end of the current market rally - although it's quite likely that equity returns won't reach blockbuster levels in 2018. Hang on tight and stay the course
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A lot has happened on D-street in the past week. Ostensibly triggered by the re-introduction of an LTCG tax, the bellwether NIFTY index has sunk nearly 800 points in a very short span; triggering panic amongst uninformed retail investors who got in without a clear understanding of just how mercurial stock markets can be in the short run! On the positive side, the fall has served as a much-needed correction, with the PE ratio of the NIFTY nearly dropping 2X in the past week, lending an element of increased rationality to stock prices. Bull markets that do not undergo periodic, healthy corrections swell into dangerous bubbles, and invariably implode. If you're an equity mutual fund investor, here are three things you need to avoid doing right now.
"Hopping off and hopping on" to reduce their LTCG tax outgo
OK, so it's an open secret that we're a nation of 'tax saving' hungry people. Resultantly, it may seem tempting for you to sell your mutual fund units right now (if you've held on for a year or more), in order to take advantage of the 2-month window that exists until the new fiscal kicks in. My simple advice - don't do it. The steep correction that we're currently witnessing really began after 31st January, so your purchase price (from a taxation standpoint) is locked in at a NIFTY value of 11,027. Not a bad deal at all, if you ask me. Redeeming your long-term investments or stopping your SIP's will create all sorts of complications when you try to jump back aboard the equity wagon, as you'll need to wrestle with an entire army of your own behavioural biases while doing so!
Rushing in hook, line and sinker
So, you were one of the smart ones who had sensed that buying heavily into a market where the bellwether index is priced at 28 times current earnings wasn't necessarily the most prudent of risks to be taking. Ergo, you sat in liquid funds and bided your time, or began STP's (Systematic Transfer Plans) from liquid funds to equity funds. Now, you're sitting on a neat cash pile - and have a market that's corrected heavily. Buoyed by your recent success, and your optimism, you may be led into investing large lump sums on a single day. This is best avoided - instead, aim to continue your STP's in a disciplined manner, or at least stagger your lump sums in a few tranches over the next couple of months. Timing tops and bottoms of the markets is an exercise in futility, so don't even try. When you do get in, mentally prepare for things to get worse before they get better.
Succumbing to the loss aversion bias
For those who quixotically invested into equity mutual funds after the markets had already gone up heavily, the famed loss aversion bias will be kicking in very soon' prompting you to cut your losses. Admittedly, it isn't easy to see your hard-earned money slipping into the red! Your mind will begin to play tricks on you - the foremost being the voice in your head that tells you to 'get out now, and get back in when things get better'. Understand that this is a trap. Equities are meant for long-term investing, and it would seem that we're not quite at the end of the current market rally - although it's quite likely that equity returns won't reach blockbuster levels in 2018. Hang on tight and stay the course.
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