It's a familiar story during every bull run...
The stock price of the company keeps scaling new highs every few days. It lures you to jump on the bandwagon. And within a few days, you exit with healthy returns.
You repeat the same with another well-performing stock and are rewarded handsomely again.
The experience lures you to try this with another stock with all the gains you have made so far. But by this time, the prices start to correct. You persist for some time, waiting for the cycle to reverse and press the panic button.
It is more common to the stock trading than stories of people who exit with handsome profits. Therefore, experts advise that one should not try to time the market and/or run after abnormal returns. Because you rarely know when the next downturn would begin, let alone predict a Lehman or COVID-19 pandemic-type collapse of the stock or bond market. The market goes through ups and down; cycles are the only thing predictable about the financial markets.
If you are investing consistently over time with an objective in mind, then your investment might be shielded from the stock market cycles.
What pays, in the end, is investing at regular intervals, as the returns will get averaged out.
How will you know if returns are consistent returns?
Returns should not be seen in isolation. One way to see if returns are consistent is to compare with the benchmark over time. The fund's net asset value can go up or down, but as long as it is more than the benchmark over the long term, the returns are seen as consistent.
Equally important is checking the consistency of a mutual fund in delivering returns before investing. A fund may have delivered consistent returns for one or two years but not have performed well over a five or ten-year period.
Choosing a mutual fund is the first step in ensuring consistent returns to get you closer to the desired goal.
However, there is a caveat: merely investing in mutual funds does not guarantee consistent returns, as returns are a function of market conditions. There could be volatility in the short run, but investing over a longer timeframe could help beat volatility and help increase your returns.
Professional experts manage your money in mutual funds with real-time and crucial market information. It is the most significant advantage of investing in mutual funds.
A mutual fund with strong processes and risk management is more likely to deliver consistent returns. Trust an investment manager who will invest in the highest-rated companies to minimize credit risks and the schemes which are in sync with the investor's risk appetite.
Funds investing in various asset classes with low correlation can help deliver relatively consistent returns - by making investments in debt and equity in a predetermined ratio. If the balance gets altered due to market fluctuations, assets are reallocated to get back to the predetermined level. Some funds have an inherent asset allocation mechanism, like balanced advantage funds.
So, pick a mutual fund with strong processes and risk management.