To exit or not to exit the markets as they hit a record high may be the dilemma facing many an investor. Quantum Mutual Fund (QMF) advises such investors to sit tight and do “absolutely nothing!”.

In a communication to its investors late on Friday, the fund said the BSE Sensex, after hitting a historical high of 21,960.89 points, closed strongly at 21,919.79, a gain of 405.92 points. The fund conceded that in volatile situations investors would be worried about the safety of their investments and may consider cashing out when the markets hit a record high as they fear that the good times may not last forever. However, QMF pointed out that “disciplined investors do the opposite” and do not exit from the markets but hold on to their investments since short-term decisions could “damage their portfolio in the long run”.

The fund said it was difficult to predict as to which way the markets would swing. But offering investors some tips on “sensible investment decisions”, QMF said having a firm investment strategy would help investors navigate the market turbulence better. For this purpose investors should set their financial goals, fix a time horizon to achieve them and also assess their risk appetite.

Explaining the benefits of having a financial plan, the QMF said this helped investors cope with a volatile equity market better. The plan should have several key components including setting and prioritising goals in life, deciding what role existing investments would play in achieving the goals and understanding the share of each of these investments, including insurance and emergency reserves, to take care of dependents in any eventuality.

Referring to the mistakes retail investors often make, QMF advised investors to remain invested and not to exit when the markets crash, only to re-enter when they peak. Keeping track of the markets is a tough task and requires expertise, and not all are “blessed with these abilities” and they face a “high probability” of incurring losses. Investors may face two starkly different possibilities — they may take too many risks only to lose their money, or retreat into a shell and miss the opportunity to make the right investment choices.

The fund’s advice to investors was that they should spread their risk by investing in different asset classes such as equity, debt and gold and further diversify within these asset classes to shield themselves from being caught off guard. They should take recourse to a Systematic Investment Plan (SIP) since the power of “rupee cost averaging” would help them minimise losses and the compounding effect would work wonders for disciplined investors. It was also important for retail investors to keep track of their portfolios and not be dependent on any single sector. A portfolio rejig, however small, might help in reaping better long-term returns. Rather than focusing on market instability, investors should “focus more on how to develop a sound financial plan” that would help guard against market volatility.

(This article was published on March 8, 2014)
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