Five Things That Mutual Fund Investors Must Do Now

While equities have blasted into orbit over the past year, anecdotal evidence suggests that very few retail investors have actually capitalized on the blockbuster rally. In reality, the panic of March ’20 led to swathes of investors exiting equities in panic; only to sit on the fences ‘waiting for a material correction’ before they would commit to stock markets again. And now, with the recovery more or less fully priced in, investors remain as confused as ever. If this situation sounds like your own, here are five things for you to do (or not do!) right now.

Don’t chase trends

The pernicious practice of investing based on short term past returns has long been the scourge of retail investors. And now, with select themes like IT and market segments like small caps having delivered 100% plus returns over the past year, they are catching the fancy of uninformed investors. Beware of investing into something that has gone up so sharply, as what goes up invariably comes down. A lot of market dynamics have been turned on their head over the past year – for instance, technology is no longer a value sector, but a growth one. Avoid chasing trends and investing into funds that have already doubled in value. Look for high quality value funds to invest into.

Don’t wait for a correction

Sitting on the fences waiting for a correction in a bull market like this would be a frustrating exercise in futility. Considering the abundant global liquidity and low interest rates, it’s unlikely that the broad trend will turn seriously bearish anytime soon or for long enough for you to ‘time’ your investment perfectly. Instead of trying to time the market, invest into equity-oriented funds through weekly STP’s (Systematic Transfer Plans) over a period of 3 to 6 months, allowing the inevitable volatility to average out your entry cost.

Practice Asset Allocation

In bull markets, investors sometimes forget that asset classes other than equities even exist! Given the rich valuations that exist today, this can be very dangerous. Smart investors would practice disciplined asset allocation in times like these, when irrational exuberance is trumping common sense and keeping valuations stretched to the hilt. Not to say that it’s a certainty that markets will come tumbling down, but it makes sense to be prudent in such times by allocation around 50% of your investments to non-equity-oriented funds. Go for short term debt funds that will not be too severely affected in case the reserve bank starts cutting back liquidity to reign in inflation.

Hedge Risks with Gold

It may be wise to invest anything from 10-15% of your portfolio into Gold Savings funds or Gold ETF’s. In case the dreaded third wave materializes and sentiment turn bearish, we may see the yellow metal getting a shot in the arm. High inflation and the prospects of a weakening US Dollar also spell good news for Gold, so it would make sense to allocation a measured portfolio of your overall portfolio to it.

Go for Dynamic Asset Allocation Funds

Instead of plunging headlong into pure equity funds, consider funds that are structured to dispassionately increase or decrease their equity percentage allocations based on pre-set valuation models. These funds will help save you from a host of behavioural traps that are bound to come to the fore in overheated markets such as the one we are witnessing today. Sure, they will not capture the entire upside of rallies for you; but will do a great job of protecting the downside in case things head south for any reason. We all know that market sentiment can turn on a dime! In today’s turbulent times, make “better safe than sorry” your motto.