Exiting equities now can be a costly mistake, might miss out good mkt rally

Timing one's re-entry correctly is very difficult

Since the February 15 peak of 15,314.7, the NSE Nifty50 index is down 6.6 per cent. Many sectoral indexes have fared worse. Localised lockdowns have begun to take a toll on economic activity. If you are a do-it-yourself (DIY) investor, here are a few mistakes you must avoid.
 
Logging out of equities
 
The Nifty Bank Index is down 16.6 per cent since the market’s February 15 high. Realty, auto, and media have also fared poorly. In such times, many investors are tempted to exit equities. They believe they can always re-enter once the market starts moving up again.
 
But as a recent Morningstar study showed, market rallies tend to be concentrated on some days of the year. If you are not in the market on those days, you will miss out on the rally and your returns will lag behind those investors who stayed put.  “Don’t try to time the market. Last year, many people felt happy they had exited and the market went down further. But they were not able to time their re-entry right and missed out on a very good market rally,” says Anil Rego, founder and chief executive officer, Right Horizons.
 
Also, markets may rebound once this second wave of the pandemic ends. “There could be a massive demand-led growth after Covid. Equities across the board will benefit from it,” says Vivek Bajaj, founder, StockEdge and Elearnmarkets.

 
Loading up excessively
 
The other mistake would be to load up heavily on equities, expecting to make a quick buck if markets rebound fast, in a replay of last year’s events. But this year’s script could be different. With the US economy in a better shape, the Federal Reserve may not pump in as much liquidity this year as it had last year. If you do buy equities for their attractive valuations, invest with at least a three-five-year horizon.   
 
Purchasing thematic funds
 
Over the past one month, pharmaceutical funds (category average return 12.57 per cent) are clear outperformers, while information technology funds (1.52 per cent) have avoided losses. 
 
Defensives did well in the earlier phase of lockdowns last year. But remember: Loading up on any sector fund is risky, unless you understand sector dynamics and valuations. So, stick to diversified equity funds.
 
Rushing into long-term debt
 
Last year, the RBI had cut the repo rate by 115 basis points to support the economy. Longer-duration debt categories like gilt funds gave an average return of 11.1 per cent in 2020. This may not get repeated again. Interest rates are unlikely to soften this year and could well harden. If, based on past returns, you are looking to invest in longer-duration bond funds, that would be a mistake. Also avoid investing on the assumption that rates will be cut. If rates rise, you could end up with losses in these funds.
 
Stay in shorter-duration debt funds and one-year fixed deposits. Avoid locking into rates for the long term.
 
Avoid loading up on gold
 
Gold tends to do well when equities underperform.  “High liquidity globally, expectations of high inflation, and the rupee’s depreciation could help gold perform well in FY22,” says Kishore Narne, associate director and head of commodities and currency, Motilal Oswal Financial Services. Still, avoid betting heavily on the yellow metal. Stick to an asset allocation approach and limit exposure to 10-15 per cent.
 
Finally, avoid knee-jerk reactions. Stay invested in equities and other asset classes in line with your asset allocation and with a long-term horizon.