Where to invest now?

When gold and the Indian equities, two uncorrelated assets, make a new high together, many individuals find it difficult to make their investment decisions. This is especially true, when the world over, the markets are usually nervous ahead of a rate-cut in the US. Prices of stocks, commodities and government securities are volatile. That makes even long-term investors worry if equities will fall and how much. Predicting the direction of prices of stocks in the near future is a tough task. In the past, many have gone wrong with their estimates. Still a large segment of investors keep worrying about corrections and end up missing many opportunities. Peter Lynch expressed it in apt words, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

Instead of sitting on cash hoping stocks to correct, it is better to take an investment approach based on asset allocation. However, it is easier said than done. Here are a few things investors should consider:

Lump sum or SIP

To spare cash in hand is a challenge for many investors. They find it difficult to invest in equity funds at current levels. The best way to solve this problem is to seek guidance from the current asset allocation of an investor. Some of these are first-time investors with a very long-term view. These investors should ideally start with systematic investment plans and can add lump sum if there are corrections in the equity markets. If an investor has zero allocation to equities, then she should gradually build her allocation to equity over the next 6-12 months. Do not rush.

For investors who are under-invested in equities, investments through SIP will help them achieve the desired allocation to stocks.

Diversified or thematic

Nowadays, many investors are keen to explore more mutual fund products. However, they tend to do so ignoring their risk profile. For most investors, especially those who are yet to see a full market cycle, diversified equity funds make a good investment. These schemes include large-mid cap, flexi-cap and multi-cap schemes and offer exposure to a relatively broad-based equity market, and form core portfolio of a mutual fund investor.

Thematic funds can be tapped only after constructing the core portfolios. Matured investors with a clear understanding of market cycles or having access to advice should consider thematic funds. If keen on thematic schemes, investors should consider structural long-term and broad-based themes such as manufacturing and consumption. Sector funds can be riskier than theme funds.?

Hybrids make a cut

Though equity funds offer higher returns relative to other avenues offering exposure to equities, they also come with relatively higher volatility. Investors with a moderate risk profile keen on cutting down the risk, should invest in equities through hybrid funds such as aggressive hybrid, multi-asset funds and aggressive hybrid funds.

For investors with no clearly defined financial goals and a view on various asset classes, it makes sense to invest in a multi-asset fund. These schemes help investors to benefit from movements across asset classes, as fund managers allocate money to stocks, bonds and commodities depending on their relative attractiveness.

In the past three years ended September 25, 2024, multi-asset funds and aggressive hybrid funds have given 14.8% and 15.2% returns respectively, on the average, as per Value Research.

If an investor finds it difficult to hold on to her equity investments due to fear of a possible, switch some component to a multi-asset fund. This way an investor will book some profits and allocate money to non-equity schemes as well. These schemes have relatively lower allocation to equities. And equities turn even more attractive, then they may allocate more to equities.

Asset allocation

Booking profits can also be done by switching money to debt funds, or equity savings schemes that have a gross allocation of 65% to equity and equity related instruments. Investors should rely on their asset allocation more than anything else while making such a decision. There is no point in remaining invested in an equity fund, if the accumulated balance in the scheme is enough to pay for the desired financial goal. For example, if an investor has reached the accumulation goal of Rs 30 lakh to make a down payment for the purchase of a house, then she should take the money out of equity schemes and keep that money in a debt fund or a fixed deposit. This ensures that the money is not exposed to the vagaries on the stock markets. The other side of this also holds good.

If an investor has a financial goal far away, say funding retirement over next 10 years, then she should not be worried about short term volatility in the stock markets.?

So, you must remain invested and keep adding investments through STP and SIP. In the long term, volatile phases appear like an opportunity which you must not miss as a seasoned investor.

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Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.

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