Don’t get Swayed by Euphoria

Market movements should not determine the components of your portfolio. Stay focussed. Stay grounded.

It is an irony of sorts. Business Standard reported that equity mutual funds attracted inflows of little over Rs 10,000 crore in May 2014. During the same period, investors sold units worth Rs 8,200 crore, translating into net inflows of just over Rs 2,000 crore, and 3,46,000 equity folios were closed. In other words, redemptions continued as the market scaled new highs and investors proverbially struck while the iron was hot. On the other hand, others are flocking to the market on the assumption that a rally is in sight.

The truth is – no one can know for sure where the market is headed.

In an interview with The Economic Times, Mark Mobius of Franklin Templeton claims that India is in a bull market which will probably continue going forward. “There will be correction along the way and there will be disappointments as India still has problems in the economy. But at the end of the day, it will continue to have a very bullish market,” he says.

The Telegraph quoted Gary Greenberg, an emerging market fund manager for UK-based fund firm Hermes. He claims that the market “is almost certainly due for a cold shower when it realises that Mr Modi’s abilities are limited and progress will be halting, but once it resets expectations to the middle ground between euphoria and despair, we think that with a degree of success on these issues, the market can make steady progress over the medium term.”

Our advice to investors is to not get carried away on whether a bull run is here to stay and when the imminent correction is due.

If you want to buy……..

If you are considering an addition to your fund portfolio, focus on what you are buying, and the reason behind it. Start by looking at the various funds and see how they fit in with your risk profile. If you are risk averse, then avoid sectoral and mid-cap funds. Stick to large-caps instead. If you do not start out with some basic premise on what your portfolio should hold, you will be easily swayed by fear during downturns and greed during bull runs.

Don’t get swayed by latest returns

Besides looking at the investment mandate of the fund, and its investing style, pay close attention to consistency of returns. A common mistake investors make is to bet on the fund that recently delivered the best performance. The latest chart toppers can tumble as fast as they have risen. Chart topping performances are not easily sustainable. Right now mid-cap and infrastructure funds are throwing up some impressive numbers. But that does not mean they will be a good fit to your portfolio.

If you want to sell…….

If you do want to sell your funds, ensure that you offload those that you are not keen on continuing with. There may be some purchases you made either because you got carried away with the returns at that time or you misunderstood its investment mandate. Now is a good time to get rid of the junk, or rather, mistakes, in your portfolio. Let’s say you invested in a banking and financial services sector fund which delivered phenomenal returns in 2007 only to slump in 2008, and once again tumble in 2011 only to zoom ahead in 2012. The point of investing is meeting financial goals, not developing ulcers. If the volatility is giving you sleepless nights, then by all means sell.

Whatever be the state of the market, buy smartly, ignore the drama and hold for the long term. The investors who continued with their systematic investment plans all through last year and the start of this year will be a contented lot when the next bull run takes off. Take a cue from them.

(Source: Morningstar, 10 June 2014)