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Is it time to be cautious?

Dhirendra Kumar discusses the current market situation and names a couple of things ordinary investors can do to reduce their risks

I have invested my long term money in SIPs in 4 balanced funds. When all market indicators are positive - EPF money entering the market, domestic investors increasing SIPs, US markets touching new highs, interest rates falling, oil prices remaining stable, government policies improving, shouldn't ordinary investors be cautious? How do they do this? Do fund managers do anything to reduce risk?
-A K Jain, Delhi​

Yes, absolutely there is a need to be cautious. A lot of money is pouring into the markets and they are going up but corporate earnings are not growing. If the market goes up without corporate earnings increasing, the market is getting more expensive. Fund managers do exercise caution considering this situation. Your money is going into four balanced funds and depends on the outlook of four different fund managers. Balanced funds invest 30-35% of their corpus in debt and fund managers automatically book profits to maintain their portion as markets go up. Balanced funds themselves are thus a good risk-reduction tool.

Ordinary investors have only two routes to reduce risk:

  1. Increase your time-horizon and be prepared for volatility in the future.
  2. Move some money from equity to debt. If all your money is in balanced funds move some money to pure debt funds. However, do not do this in one go, as a knee jerk reaction. Many people did so at the end of last calendar year and missed out a good 15% gain. If corporate earnings increase the market will no longer look expensive.
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