There is a saying in the markets that all bull markets must end badly. Markets surge, new investors flock in, markets surge more, and then one day the tide turns, hurting a generation of investors who swear never to have anything to do with equities again.
With the Sensex now at close to 29,000 and the Nifty a whisker away from the 9,000 mark, we are entering euphoric times. Here are five tips that could help you ride this bull market safely:
Existing investors shouldn't abandon their asset allocation: Stick to your asset allocation (equity:debt:gold mix) based on your risk profile. Don't abandon debt and gold, and move all out into equities to maximise your gains. That is a recipe for disaster.
New investors should enter equities warily: A bull market is not the best of times for new investors to enter the markets. If you do enter now, enter through SIPs, don’t put your entire portfolio in equities, and invest with a long horizon of five years or more.
Avoid flavour of the season investing: SIPs are the flavour of this season. The mutual fund is aggressively touting the virtues of SIPs. But with the markets at current high levels, you can make losses even with SIPs if you have a short investment horizon. Invest with SIPs for five years or more.
Beware of high valuations in midcap and small-cap funds: Valuations of mid-cap and small-cap stocks are at very high levels currently. The Nifty 50 is at 24.45, but the Nifty Full Midcap 100 Index is at 52.97 and the Nifty Full Small cap 100 Index is at 37.88. Clearly, the weightage of these funds would have gone beyond the assigned level in your portfolio. Book profits and rein in your exposure.
Avoid NFOs: Every bull run sees a spate of NFOs (new fund offers). In 1999-2000 it was tech stocks and in 2007 it was infrastructure and realty. Nowadays, Sebi, the regulator, has turned very strict about allowing fund houses to come out with NFOs. Nonetheless, if they do come out, avoid them, especially closed-end funds and thematic/sectoral offerings. If you want to invest in equities now, stick to plain-vanilla diversified funds.
Three things you should do
One, besides growth-oriented equity funds, diversify your exposure to asset allocation funds and value funds. These funds tend to contain downside risk better when the markets turn.
Two, even among growth-oriented funds, go with funds that have proven their ability to contain downside risk.
Finally, if you want to invest a lump sum amount, don’t do it at one go. Use the systematic transfer plan (STP) route, which involves your putting your money in a liquid fund first, from where it gets invested in an equity fund each month.