In the current market scenario, here are some of the dos and don’ts for managing your equity investments.
Number 1 rule: Don’t invest for short term
Most of the first-time investors are attracted by mutual funds during bull markets. They invest in lumpsum amounts expecting quick and high returns. However, every bull run is followed by a bearish phase and this may keep your investments in red for a considerable time to come. Therefore, opt for investing in equity funds only when you have a time horizon of 3 years or more. If you stay invested for a horizon of 7-10 years, then you can make most out of the bull and bear phases that largely coincide with the changes in the stages of an economic cycle.
Don’t compromise your liquidity
Often bull market phases tempt many investors to channel their entire surplus into the equity funds. Sometimes, equity markets may drift towards worse scenarios for various macro-economic or geo political factors and you may face a financial emergency during that period which may lead you to either redeem your mutual fund investments or take huge loans from banks. So only if you have sufficient allocations for your emergency funds and other short-term goals, you may invest your monthly surplus in equity markets. Create a market crash fund that consists short-term debt funds to exploit attractive buying opportunities in the equity segment.
Invest through the SIPs
Due to the highs and lows of the market, you may sometimes end up missing the bus while trying to catch up the market corrections. Thus, instead of timing the markets to time your investments, route your mutual fund investments through the SIPs. With ensuring regular investments on pre-determined dates over a period, SIPs help you to not track the market and enable cost averaging by buying accordingly at the time of market corrections, also providing returns from the power of compounding.
Don’t overexpose yourself to sectoral or segment funds
Overexposing yourself to sector or segments comes with significant risks. Even if prospects remain bleak for the foreseeable future, those fund managers of sectoral/thematic funds who cannot invest in sectors beyond their investment mandate are forced to remain in those sectors.
Even the mid and small cap funds get riskier assets at the time of bull markets as these companies decline most during the steep corrections and bear phases.
therefore, build a portfolio consisting of large and multi cap funds so that you could use sectoral, thematic and mid cap funds as tactical investments to boost your overall returns.
Don’t panic in case of steep corrections
Many first-time investors who invest in lumpsum during bull phases redeem their investments during market corrections. But those investing through SIPs do not fear for further losses. The former may lead to unnecessary booking of losses, the latter can jeopardize your financial goals. Let’s not fear the market changes, just treat it as an opportunity to create long term wealth.
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