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Lessons for investing at a market peak

With the market trading at all-time highs, these 5 dos and don'ts will save you from any fund-related blow

Lessons for investing at a market peak

Arising tide lifts all boats. Therefore, when a bull market is in progress, it's really difficult to distinguish between really great equity funds and the also-rans.
Taking stock of the mutual fund performance on www.valueresearchonline.com today, you find all categories of equity funds sporting impressive returns. As on May 30, 2017, large-cap equity funds have delivered a 21 per cent return in one year and 16 per cent CAGR in five years. Multi-cap funds sport a 25 per cent one-year return and a 19 per cent CAGR for five years. Mid- and small-cap funds feature five-year CAGRs of 25 and 29 per cent, respectively.

But then the returns look so good because the starting point for these computations is in May 2012, a market low.

When most of us make our equity-fund investments though, we do not have the luxury of timing it nicely to market lows. We tend to invest based on our income levels, cash flows and financial goals that are likely to crop up in future. Many first-time investors also make the mistake of jumping into equity funds after they've demonstrated impressive returns over one or three years. AMFI data show that equity and balanced funds received a mere Rs 660 crore in net inflows in the downbeat market of 2011-12. In 2016-17, net inflows had zoomed to over Rs 1 lakh crore.
So, given that most retail investors do not time their investments very carefully, what happens if they get their timing wrong and invest at a market peak (i.e., just before a big crash)? Are some equity funds and fund managers better at delivering long-term returns from market peaks than others?

With the Sensex currently at a lifetime high after hurtling past 31,000, these are very pertinent questions.

We decided to find the answers by evaluating the equity-fund return experience for investors from previous bull-market peaks till date (May 30, 2017). For the purpose of this analysis, we analysed the performance of all categories of equity funds from two previous occasions when the markets hit a new high before they came crashing down. We chose January 8, 2008, which marked the high point of the capex bubble (it was popped by the global credit crisis) and February 11, 2000, which was the peak of the dot-com bubble. And we have arrived at five key lessons from this exercise. Find them below.

  1. Tone down your expectations
  2. Don't avoid mid/small-cap funds
  3. Don't go passive
  4. Choose them right
  5. Avoid thematic bets