An investor invests when he sees the right price. The concept of undervaluation or overvaluation doesn’t matter for long-term investors.
The markets are trading at all-time highs, and many investors, who want to invest, are hesitant and waiting on the sidelines for correction.
If, according to you, markets are overvalued, think again. Let’s take an example of two funds that have weathered the worst crash. The HDFC Top 100 Fund’s NAV in December 2007 was Rs 167.00. The financial turmoil of 2008 triggered a worldwide crash in the markets. By February 2009, the NAV of the fund was Rs 85.00. For someone who started investing in 2007, it would be depressing to watch their portfolio bleed by 50% in one year.
In scenario one, the investor panics and exits his investment fearing more erosion of capital. In scenario two, the investor holds out and continues his SIP. What happens? The investor who held out and continued to invest reaps rich rewards. In the next 12 years, HDFC Top 100 delivers an annualized return of 46%. The present NAV of the fund is Rs 644.00.
Now let’s consider Franklin India Prima Fund. Its NAV at the beginning of January 2008 was Rs 324.00. In one year, i.e. by January 2009, its NAV crashed to Rs 107.00, enough to unnerve even the most hardened investor. But in the next 12 years, the fund delivered a staggering 112% annualized return. The present NAV of the fund is Rs 1456.00.
An investor invests when he sees the right price. The concept of undervaluation or overvaluation doesn’t matter for long-term investors. The above examples clearly show that long-term investments never lose. In fact, the sharp rise and fall allows the investments to compound at a faster rate.
Here are five things you should remember while investing in mutual funds when markets are high:
1. Re-evaluate your portfolio: You may be feeling quite wary of market levels or feel inclined to withdraw your investments. Consult a good financial advisor and get your portfolio re-evaluated. If you are a pure equity investor, you can shift some of your investments to good-quality debt funds. It will protect your investments in case of volatility.
2. Goal evaluation: If your goals are met, it’s time to re-evaluate them. You can set up newer goals that will help you to move your money efficiently. If you followed aggressive investing before, you can follow a slightly conservative policy now. This will help you avoid greed and fear traps.
3. Do not stop SIP: The biggest benefit of SIP is rupee cost averaging. Even if you invest at highs and markets turn down, SIP will help you to cost average your investments. Wealth is created in the long term. Hence, do not stop your SIP at any cost. Historically, the downturn in markets lasts for one or two years before upwards resumption.
4. Diversify your portfolio: Instead of withdrawing your investments, you can systematically transfer your portfolio to debt funds, international funds or commodity funds. This will assure peace of mind for your portfolio. Also, you can continue your SIP knowing well that a balanced portfolio is going to protect you from value erosion.
5. Do not try to time the market: Every investor has made this mistake at some point in his investing journey. Not only it results in missed opportunities, but also it can lead to erroneous decisions that can hamper the growth of your portfolio. Remember, the time in the market is more important than the timing of the market.
Finally, do not hesitate to invest in the market. The rise and fall are part and parcel of the market. A good financial advisor can help you formulate a good investment plan that can help you to create wealth in the long term.
(By Abhinav Angirish, Founder, Investonline.in)