Investment decisions at a high point in the market are difficult to take. Past performance is hard to make sense of because there have been so few similar situations in the past. In any case, investors can easily draw conclusions from the past because the peak of the market is easily identifiable.
However, as we all know, the future is a little bit harder to figure out than the past. Not only do we not know whether we are at a market peak right now, we do not even know whether we are even near one. Certainly, equity markets seem stretched. Valuations are high, profit growth is anaemic and there are any number of ifs and buts that are lined up against further rise in equity prices. Even as I write this page, for at least a fortnight, only the largest Sensex stocks are rising while every other segment of the market is falling.
However, like all short-term trends, this may mean something or it may not. The hard fact underlying market movements is that there are always a number of factors, some pushing prices up, some down. Some of these factors are market-wide, some relevant for different sectors or type of companies and some for individual companies alone. Many of these are root causes or motives for traders or investors to buy stocks or sell them or to just stay out of the market.
Finally, these factors are expressed in a decision to buy or sell or do nothing. This is the money flowing in or out of the market and it's always the proximate cause of market movements. When one looks at the Indian markets from this perspective, the reason for the relentless rise becomes obvious. There's something like Rs 4,000+ crore a month flowing in through SIPs into equity mutual funds every month. That's Rs 48,000 crore a year. Two years ago, it was half of this. There's more. The EPFO is now investing in stocks at Rs 13,000 crore a year. NPS too is at least Rs 2,000 crore. Even if some SIP investors turn shaky, EPFO and NPS inflows will only rise steadily as employees and salaries increase. All this adds up to more than Rs 60,000 crore a year and will go on growing.
As mutual fund investors, this actually makes things harder for us. Markets fall when a large number of negative reasons combine. There's no point waiting for some opportune time to invest. Trying to time the markets, waiting for some kind of blip 'because the markets are overpriced' is exactly the kind of timing activity that does not work.
Recently, we published the results of a landmark study of SIP returns. In that study, we saw clearly that the best strategy has always been to continue with SIPs without paying any attention to what the market levels are. Those who started SIPs (or continued with SIPs) during market peaks like 2001 and 2008 did very well, provided they had at least three-four years of their investments to go at that point. And the study was for all funds regardless of quality. A little additional care in choosing a fund and the prospects get even better.
Really, that's all there is to it. The basics you already have. You know SIPs are best. You know continuing them regardless of market conditions is best. You are reading our magazines and are a member of Value Research Online, so you already have access to the best fund research and ratings in India. That's all you really need to make the best-possible investment decisions.