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Not a Good Idea to Time the Market

Don't try to time the markets. Invest systematically in equity funds for the long run & reap the rewards

I have been investing in equity funds since 2007 and the funds that I invested in didn't perform well until recently. Now I find that the funds I invested in have made 8-10 per cent returns. My advisor is asking me to book profits, move the money to liquid funds and invest again when a correction comes. Should I do this?
- Ram Kumar

What your advisor is asking you to do is to time the markets. Even seasoned fund managers aren't successful at market timing, forget a retail investor. Lets delve to September 2013, when everyone was bearish about the economy and the markets. You need to recollect if your advisor was able to predict that the stock markets would zoom over the next nine months and that equity funds would deliver a 50 per cent-plus return? If the answer is no, you should not trust his suggestion to book profits now, because he is not an expert to know when the next correction will come about, so that you can resume your investments.

In fact, if you rewind to September 2013 and see what market experts and advisors were saying at that time, you will find that worries about the rupee and the economy were topmost in everyone's mind; hardly anyone would have seen this bull-run coming.

If you have invested in equity funds, you must have done so with a long term horizon or a financial goal in mind. By sticking with your plan over the last six years, you have already experienced the worst part of equity investing-volatility, uncertainty and the pain of a bear market. Now that your patience has just begun to pay off, you should stay on and reap the rewards of equity investing?

Equity markets, and the funds which invest in them, seldom deliver returns in a steady manner from year to year. You may have exceptional returns in one period like we have had in the last nine months, and face extended periods when the returns are poor or even face steep corrective phases.

But as each of these phases is impossible to predict, jumping in and out of funds in an effort to maximise your returns is an effective way to destroy wealth. In fact, behavioural finance tells us that investors are emotionally wired to act at exactly the wrong times, something that we had detailed in the cover story of the June edition of this magazine. So, you may actually end up investing just when the markets are over-heated or 'book profits' just at the beginning of a new bull market.

Today, with the market valuations still at reasonable levels, with the Sensex price-earnings of about 18 times and the economy just beginning to pick up from sub-5 per cent growth and corporate earnings looking up after a long period of sluggish growth; indications are that this may be just the beginning of a new more positive phase in the Indian markets. Therefore, markets are certainly not in a bubble territory and therefore, there is no saying when a correction will come about.

We strongly advise you to stay invested and to continue with your systematic investments and reap the benefits of investing through SIPs, which negates the psychological urge of timing. By continuing your SIP irrespective of the market movement, you ensure that you average your investment over markets ups and downs.

Unless you need the money for any specific reasons, do not get swayed by your advisor's suggestions.