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Key things to remember while investing in mutual funds when markets are high

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There are ways in which one can avoid falling into the trap by considering the following points before investing in mutual funds when markets are high.

Key things to remember while investing in mutual funds when markets are high
Post-COVID saw a record number of investors coming to the market. Direct investments in equity, as well as investments in mutual funds, saw record new client additions. While new investors coming to the market is a good sign for equity markets, from the investor’s point of view, it is good as long as the markets are going up. A pause or a correction in the market tends to make participants apprehensive.
Since its high in mid-October, markets have corrected by nearly 9 percent, giving anxious moments to investors, especially the new lot who have not seen a deep correction, let alone a downtrend.
It is times like these that make or break an investor. For a long-term investor, such corrections are mere speed bumps and should not matter over the length of the investment. However, investing is both a game of skill and discipline. It is the latter that is the reason for poor performance among investors. Discipline is normally sacrificed if investments are made near the market top.
There are ways in which one can avoid falling into the trap by considering the following five points before investing in mutual funds near the market high:
Portfolio diversification:
Portfolio diversification is one of the best ways to de-risk your portfolio. Care should be taken that in the name of diversification, we are not investing in funds with a similar risk profile. Diversification across categories like large-cap, mid-cap, and small-cap is advisable. When the markets are wild, one can also consider investing in defensive sector funds, like pharmaceuticals and consumer sectors.
Timing the market: There is no investor alive or long gone who has been able to call the market tops and bottom consistently. Trying to time the market is an exercise in futility and one should avoid attempting such trades or repent if one has missed out on the opportunity.
Fund selection: An actively managed mutual fund that has a strong and long track record and has a better chance of recovering fast in case the market falls. New funds, especially from new fund houses with a short track record, maybe riskier bets, especially when markets are at new highs. You can carefully select the right funds which suits your goals and invest through a reliable platform like TradeSmart.
Do not stop SIPs: A cardinal rule of systematic investment plans (SIP) is that they should be continued irrespective of the market condition. This helps in rupee cost averaging and helps the investor increase the number of units when the markets are down and the fund NAV has also come down. It also helps the investor to stay in the market when the going is good.
Monitor and re-evaluate your portfolio: Investing is like a business. It needs to be monitored and nurtured carefully. Shifting a fund that has consistently been a non-performer as compared to its peers in the same category is advisable. Similarly, a shift in asset class from equity to bonds or vice versa can also be considered depending on the state of the economy.
Studies have found that investments made on market highs if allowed to stay as they are give good returns over the long run, as the market tends to move higher. In investing, if you have a game plan that covers systematic investments, diversification, and monitoring, you are never late to the party.
The author, Vikas Singhania, is CEO at TradeSmart. The views expressed are personal
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