5 Key Points to Consider While Choosing Equity Funds When Markets are High
After the nosedive in March 2020 due to the pandemic and associated lockdowns, the markets have done well to recover. In fact, later, the S&P BSE Sensex hit an all-time high and the Nifty 50 recorded a lifetime high as well. Both benchmark indices traded higher than these levels, recording new all-time highs in trading sessions afterwards.
The markets were highly volatile throughout the year which kept certain investors at bay. While the markets are at an all-time high, these investors are now contemplating if they should enter the markets now or not. Here, we are going to talk about investment strategies that can help you invest during market highs and offer five key points to consider while choosing equity mutual funds at such times.
A Quick Look at Equity Mutual Funds
Equity mutual funds primarily invest in stocks and equity-related securities. The fund manager tries to invest across different industries and market capitalizations to meet the investment objective of the fund.
The Securities and Exchange Board in India (SEBI) defines equity funds as follows:
‘Equity funds are designed to offer capital appreciation over the long-term by investing a major part of their corpus into equities. These funds have higher risks as compared to other schemes. They offer a range of options to investors like dividend options, growth options, etc.’
Since equity funds invest primarily in stocks, volatility in the stock markets impacts the returns offered by them. There are between 5500 and 6000 stocks listed on stock exchanges in India.
Fund managers conduct a thorough research and choose the ones that can help them generate good returns. Most equity funds also have a benchmark that the fund manager tries to meet or better. These benchmarks are usually popular indices of the market or segment that the fund is focused on.
5 Key Points To Consider While Choosing Equity Mutual Funds When Markets Are High
When the markets are rallying, stocks and indices are rising too. Hence, most equity mutual funds perform better during market highs. While investors who have already invested in equity funds reap the benefits during such rallies, people who are planning to invest when the markets are at their peak can get sceptical.
If you are planning to invest in equity funds when the markets are high, then here are 5 key points that you must consider.
#1. Timing the Market Can Be Counterproductive
The primary concern of investors unsure about buying equity funds during market highs is that since the markets have peaked, the prices are likely to fall. Hence, they try to stay away. While intraday traders try to buy low and sell high, this can be a dangerous approach for investors.
Stock markets are inherently volatile and ups are downs are common. When you invest in equity funds, trying to time the market can be counterproductive since the focus shifts from the performance of the fund in the long-term to the volatility of the market and can lead to scepticism or erroneous choice of the equity scheme.
Remember, equity mutual funds are excellent long-term investment tools. And, over time, volatility evens out offering good potential for returns.
#2. Choose Schemes Based on Your Investor Profile
Every investor is unique and has specific investment requirements. There are three essential aspects of every investor’s profile – financial goals, risk tolerance, and investment horizon.
Regardless of the market conditions, staying true to your profile and preferences can help you choose investments that are best suited to you. Even when the markets are peaking, if you are looking at investing in equity mutual funds, ensure that you don’t get overwhelmed and choose schemes based on your investor profile.
#3. Look At The Long-Term Performance of The Scheme
If you look at the performance of equity mutual funds in 2020, most schemes have offered decent returns since markets have rallied during the second half of the year. However, this is not an indicator of the long-term performance of the funds.
#4. Efficiency Of The Fund Manager
The performance of an equity fund depends a lot upon the efficiency of the fund manager to optimize the portfolio during various market cycles. Usually, when people talk about market cycles, they tend to focus on the market downturns more than rallies. This is probably because of the general presumption that downturns require better management skills than rallies.
However, when the markets are peaking, it is important for an equity fund manager to rebalance the portfolio to book profits and purchase stocks that can generate value in the future. Failure to do so can be a lost opportunity.
Hence, before investing in an equity fund when the markets are high, research the fund manager’s past portfolios and check how he has managed the fund during previous market rallies. This should give you a good idea about the strategy and approach he might follow with the current fund.
#5. Avoid Emotion-Based Decisions
When the stock markets are high, most equity funds generate good returns. However, before choosing a fund, it is important to remember, that since stock markets are inherently volatile, the market high won’t last forever.
Hence, they must try to not get swayed by the over-optimistic market sentiment and consider a long-term view before choosing the scheme. This would mean going through the scheme-related documents, asset allocation, portfolio composition, etc. Also, it is important to remember that markets are primarily governed by investor sentiment.
Hence, when the markets are at a high, as an investor, you might experience two extreme emotions – over-optimistic, since the markets are rallying or sceptical since you might feel that the markets might fall from here.
Regardless of your view of the market, it is important to remember that equity investments tend to offer good returns over the long term regardless of the market volatility. Hence, while choosing an equity fund, it is important to avoid any emotion-based decisions. Get back to the basics and choose the fund that aligns with your long-term investment objectives.
Summing Up
Remember, choosing the right investment should depend on your investment preferences and objectives and not on external market conditions. This is true for equity mutual funds too. Regardless of the market sentiment, focus on the fundamentals and choose the fund that helps you achieve your financial goals with ease.
Disclaimer: This blog has been contributed by the content desk of Quantum Mutual Fund AMC. The views expressed here are of the author and do not reflect those of Groww.
Mutual fund investments are subject to market risks, read all scheme-related documents carefully.