The Hindu Business Line : Waiting perpetually for bottom fishing may not be a good thing

Money has often been a cause of the delusion of multitudes… Men, it has been said, think in herds; it will be seen they go mad in herds -- Charles MacKay (Extraordinary Popular Delusions & The Madness of Crowds, 1852)

We thought we would begin with this little quote, just a couple of days after the 500-point-plus drop in the Sensex. If your portfolio is heavy on equity funds, you would know why we have used it at this particular juncture. What you wouldn’t know – not yet, that is – is whether this trend would sustain or whether fresh money would rush in to fill what may yet prove to be a small gap in the continuum.

And while your mind is swaying between faith and doubt, here’s something that you need to keep in mind. Equity funds have had a near-relentless run in recent times, generally creating wealth for their unit holders. They have reflected, fairly and squarely, the advancing stock market, a trend that is apparent from the latest NAV tables. The last three years, for instance, have seen diversified equity funds delivering smart returns, the several temporary setbacks that they have faced notwithstanding.

Time for profit-taking?

Is it different this time? No doubt, that’s the question everybody is asking, a question that has no immediate answers. This lack of clear answers would probably prompt you to consider profit-booking, at least partly, assuming you have not done it already. You would also possibly pray for the market to fall further – in the hope of putting in more money at lower levels.

The point is waiting perpetually for the bottom to be reached may not be such a good thing. In fact, you may lose an opportunity by waiting for far too long. The strategy, therefore, is to assess the situation well and keep your cheque book ready for investment at regular intervals.

The other strategy is to keep realistic expectations. Returns from equity funds may not be as good as they were in the past few years. In fact, the scenario may be pretty dull, an event that you should stay prepared for. You should also be ready to remain committed to your investments for a considerable stretch of time.

Debt scenario

Should you, if the equity market turns dreary, look more closely at debt funds? Should you start allocating more to fixed-income options? These are issues that only you would be able to address. However, before you start picking up debt funds one after the other, consider the returns they have generated in the past. Consider also the latest preferences of debt fund investors.

For the records, the fixed-income scenario is marked chiefly by shorter term products. We are referring to the liquid and other short term plans that are getting sold. As you know, the interest rate situation has in recent times changed drastically. The market, as always, would stay tuned on inflation, interest rates and the impact of recent hikes. Mind you, we would soon know the central bank’s latest views on these matters.

While certain categories of shorter term funds are indeed popular, longer term funds are going nowhere. Clearly, smart investors have been avoiding them by and large. Their asset bases have shrunk, a trend that certainly requires closer scrutiny. We would perhaps take it up in our next column.

Feedback may be sent to nilanjan@thehindu.co.in

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