When the markets rise, the value of your equity investments moves up and when the markets fall, the value of capital invested also goes down.
Equity investments are subject to market risks and the capital invested fluctuates with the volatility in stock markets. So, when the markets rise, the value of your equity investments moves up and when the markets fall, the value of capital invested also goes down. The impact of market fluctuations on equity investments is more evident in the short run and as the markets gradually move up in a fluctuating manner, the effect of market volatility becomes feeble on the fund value in the long run.
Moreover, equity investments are capital investments – so, ideally one should invest when markets are low and stocks are cheaper to get more shares in case of investing in direct equity or more units in case of investing in mutual fund (MF).
To make it understandable, let’s draw a comparison with gold, which is also a capital asset. If you invest in gold when it is cheaper, you will get more gold in comparison to the amount of gold that you wold get for same money, when it is expensive.
However, unlike gold, most investors tend to invest in equity when markets are high and existing investors have already experienced gain from their investments. Moreover, when the market falls, instead of investing more, most of the new investors leave markets by selling their stocks after seeing erosion in the capital invested, thereby booking huge losses.
To avoid such behaviour, that is governed by traits like greed and fear, you may mechanise your investment process, to make investments more rational for better gains.
Equity investment process may be mechanised through asset allocation and rebalancing. Under this process, you need to invest in both debt and equity in a ratio that is suitable as per your risk taking capacity and adequate to meet your financial goals.
Once the debt:equity ratio is fixed, you have to review it in periodic intervals, say in a particular month every year and/or when the ratio becomes abnormally skewed.
While the debt part in your investment portfolio usually remains steady, the ratio generally gets disturbed due to fluctuations in equity markets. So, when the markets move up, the proportion of equity becomes higher in comparison to debt and vice versa.
For example, you have decided to keep the ratio of debt:equity in your portfolio at 50:50. However, at the time of reviewing the ratio, the market was very high and the debt:equity ratio became 40:60. So, to bring it back to 50:50, you have to sell some equity and invest the money to debt instruments.
As a result, you would end up booking some profit in high market, when fresh equity investments become risky.
On the other hand, re-balancing at the time of low market would result into flow of funds from debt to equity, which would enable you to get more shares/units at the low market and enhance the prospect of higher return.
So, after implementing asset allocation and rebalancing mechanism, you need not worry about when to invest and when to redeem to maximise your gains, as the mechanised investment process would take care of that.