When the markets are at a peak, it may be tempting to book your profits and exit; however, one is never sure how the markets will move from hereon. Will the market correct or continue to peak? Only time will tell! You probably reminisce the day you used an SIP calculator (systematic investment plan calculator) as certain the amount you need to invest every month to meet your financial goals. You are also proud of your investment, for they must have seen handsome rewards.
If you are anxious that the accumulated returns on your equity funds could be eroded when the market corrects, then here are some cues on how to re-strategize and stay invested during market highs:
1. Rebalance your portfolio:
You would have initiated your equity commitment based on an intended debt-equity asset allocation. The equity fund corpus that you projected would have been based on historical average returns from equity. The actual returns generated by the market have been way higher; this could have skewed the debt-equity proportion.
Tip: This may be a good time to evaluate the overall asset distribution and realign with the intended/initial asset allocation. The exit from your equity funds (profit-booking) has to be made after considering the transaction costs and capital gains taxes.
2. Book – profits in a staggered manner and remember to re-invest:
To benefit from any potential upside from hereon, it is best to exit equity funds in a phased manner. It is prudent to exit only those investments held for over a year, thereby qualifying for long-term capital gains tax, charged at 10% exceeding gains of Rs. 1 Lakh.
Remember: The funds that you have redeemed should be ploughed back into any other investment avenue. This is critical to ensure that your financial goals are met appropriately.
3. Move funds partially to anequity oriented hybrid fund:
An equity-oriented hybrid of balanced funds is the best way to lower your equity exposure and yet take advantage of equity taxation. You can re-invest the funds redeemed from equity investments into equity-oriented hybrid balanced funds, which have an equity exposure of a minimum of 65% to keep your equity taxation in place. TheseBalanced funds are also a great way to plan for your financial goals, which arise over a medium timeframe, typically 3-5 years. This reduces the overall equity exposure as it is a good means to gain a blend of equity and debt exposure with the same asset.
Note: It is important to use the funds from profit-booking to invest in equity oriented equity-oriented hybrid balanced funds and not route the existing commitment of SIP. This infusion into equity-oriented hybridbalanced funds can be carried out by using the SIP or systematic transfer plan (STP) where a lump sum (amount redeemed via profit-booking) is parked in a debt fund, and a certain amount is transferred systematically into balanced these funds. The amount to be transferred systematically over the tenure can be calculated by using the SIP calculator.
4. Continue investing via SIP:
The cardinal mistake that people often commit when the market starts to correct is to stop their SIP commitment. While initiating your SIP using the SIP calculator, you would have entered a tenure aligned to your financial goal; it is important to stay in the game. Especially so when the market corrects, this is when the cost averaging benefit pans out effectively.
Remember: While you would have bought a lower number of units of your equity fund on the way up during the bull run, you would buy more units as the market corrects (due to a fall in the NAV – net asset value of the fund).
5. Stay focused on your financial goals:
Aligning your mutual fund investments with financial goals will also enable you to choose the right fund. As an investor who has aligned your investments with long-term financial goals, it is important not to lose focus.
Tip: While it is prudent to re-evaluate from time to time and ensure that the portfolio conforms to your initial agenda, it is unnecessary to follow markets on a day-to-day basis.
These are some ways in which an equity fund investor can re-formulate the portfolio to align with the initial debt-equity proportions and financial goals. Market ups and downs are inevitable, and a long-term investor should stay unperturbed by intermittent hiccups, for this too shall pass!
Disclaimer: The above results are based on an assumed rate of return. Please get in touch with your professional advisor for a detailed suggestion. The results are based on an assumed rate of return. The calculations are not based on any judgments of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as promise on minimum returns and/or safeguard of capital. While utmost care has been exercised while preparing the calculator, NIMF does not warrant the completeness or guarantee that the achieved computations are flawless and/or accurate and disclaims all liabilities, losses and damages arising out of the use or in respect of anything done in reliance of the calculator. The examples do not purport to represent the performance of any security or investments. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax/ financial advisor before taking any investment decision.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.