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Financial Term of the week- Bull Market

If you are an investor in stocks or mutual funds, you’d have often heard the term ‘bull market’. It refers to a state of the financial market when the prices of the securities traded are growing and are expected to grow further. It is commonly used in reference to stocks but can be applicable to any form of security, like bonds, derivatives, or even real estate. Bull markets are not for a short term and are typically spread over long periods, sometimes lasting even years.

Knowing more about Bull Markets

A bull market is when the investor sentiment is positive. This can be caused by the economic growth of the country and/or by market speculation as well. An ideal scenario of a bull market can be when the Gross Domestic Product (GDP) grows and there is a drop in unemployment. Since the market fluctuates continuously, a bull phase is characterized by the stock prices going up by at least 20%. This is a rule of thumb often followed, although there is no common/agreed metric to measure the bull market. It is also a situation when the demand for stocks can be higher than the supply. Because of the investors being bullish, they may want to buy more stocks.

Bull Market - Nippon India Mutual Fund

The exact opposite of a bull market is a bear market, when the investor confidence is low, and the stock prices are declining. Again, when the fall from the bull market is equal to or over 20%, the market is said to have entered a bear phase. You can read more about it here.

What does it mean for a mutual fund investor?

If we talk about the stock market being bullish, it shall have a direct impact on equity mutual funds. As the stock prices go up, the Net Asset Value (NAV), which is the per-unit cost of the mutual fund scheme, also goes up and vice versa. Hence, even though you are not trading in the stock market directly, you are getting impacted by the shifts in the stock market.

Before we get into what approach to take in a bull market, please keep the following in mind -

  1. Always remember that no state of the market is permanent. If it is bullish today, it will definitely be bearish in the future. At least that is what history tells us.
  2. Whether it is bull or bear market, it is your choice of mutual fund scheme that will keep you afloat. Hence, it is important that you choose the scheme after considering your risk appetite and investment horizon.

Often, a common approach seen across investors is to buy more when in the bull phase. What you may not realize is that you are paying more for the same units when buying in a bull phase. In fact, in times like this, experts may suggest booking profits in the bull market, that is, redeeming your investments, rather than buying more units. Another strategy can be to hold on to your existing funds till the later phase of a bull market and then sell to book profits. But keep in mind, both buying or selling must be done only and only if these decisions are in alignment with your financial goals and never as a part of a herd mentality.


Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/InvestorEducation/what-to-know-when-investing.htm This is an investor education and awareness initiative by Nippon India Mutual Fund.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.