How to deal with high market levels

As you must be aware, over the past few months the markets have kept inching higher and higher. The number of phone calls we receive regarding investment advice, has been following the same trend. Investors want to put in a lump sum amount in equity mutual funds based on what they have read in the newspapers or seen on business channels; they assume that the markets are going to keep soaring.

Dalal Street

In reality however, it never works that way. There will be a correction sooner rather than later, that is the way equity markets work. At this stage the risk to reward ratio is more towards the markets correcting themselves. Then again, the liquidity levels in the markets are so high that perhaps the correction might get delayed.

Our advice to all our clients has been to put the lump sum amount in a liquid fund and from there do an STP (systematic transfer plan) to 2-3 equity mutual funds; so as to deploy the entire amount over the next 6-9 months.

The other question investors keep asking us, is whether to book profits right now as the markets are at their lifetime high. We believe that profits should only be booked if:

  1. Any of your long term goals are nearing – In such a case an SWP (systematic withdrawal plan) to a safer, short term debt fund should be started 2-3 years before the required date.
  2. Your asset allocation of equity has gone up at least 5-6% from the desired level – In this case you should definitely book profits and switch from equity to debt so that you can balance out your asset allocation while continuing with your SIPs.

Investors who are thinking that they can book profits now and buyback in at lower levels, are setting themselves up for a herculean task. Timing the markets is extremely difficult for the average investor.

So, just keep investing through your SIP’s and always remember – It is not timing the market that is important, but time spent in the market.

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