• Thu. Nov 30th, 2023

Mutual Fund SIP, Multi-Asset Mix: Strategies To Balance Risks, Opportunities During Record High Markets

Written By Sudip Mandal, vice-president of DSP Mutual Fund:

Is It the Right Time to Invest? The Indian stock market this week reached a significant milestone, with the NSE Nifty surpassing the 20,000 mark. This achievement grabbed headlines and might tempt you to jump into the market. But, it is essential to ask: Is this the right moment to invest? Let’s explore this topic in straightforward terms.

Firstly, it is crucial to understand that the 20,000 number is temporary. The stock market is ever-changing, with numbers constantly going up and down. Importantly, this is not the highest point the market will ever reach. Throughout history, we have seen peaks, and greater ones will come in the future.

So, what should investors do now? Instead of fixating on this specific number, it is wise to think about the market’s value. A common tool for this is the price-to-earnings (P/E) ratio, which compares a stock’s price to its earnings per share.

Looking at the past decade of the Nifty 50’s P/E ratio (excluding extreme events like COVID-19), we have seen it range from 17 to 25, with an average of around 20. Currently, the NIFTY 50 index has a P/E ratio of 22-23, which is considered high compared to its historical levels.

When valuations are high, it tells us two important things. First, many positive expectations for the future are already factored into the market prices. Second, there is less safety for investors entering at these high levels because unexpected bad news could cause prices to drop.

While there is a long-term connection between economic growth and markets, they do not move in lockstep. Sometimes one lags behind the other. When markets surge ahead, future returns might not be as strong. Statistically, when the P/E ratio goes above 22, Nifty 50 tends to have lower returns over the next three years.

For those who prefer investing when valuations are lower, the current situation might seem less ideal. But, there are smart ways to navigate this phase. Here are two approaches:

Auto-Pilot Investing with Hybrid or Multi-Asset Funds: These funds allow managers to adjust their investments between different assets, like stocks, bonds & gold. When stocks become more appealing in the future, they can shift your investments accordingly. This strategy offers diversification and professional management to reduce market risks.

Long-Term Investing with Systematic Investment Plans (SIPs): Consider spreading your investments over time using SIPs or STPs (Systematic Transfer Plans). This means investing a fixed amount at regular intervals, which can smooth out market ups and downs. It’s a safer approach than trying to time the market.

For existing investors with ongoing SIPs, focus on your financial goals rather than reacting to index numbers. Assess how close you are to your objectives. If you don’t need your money right away and have time to reach your financial goals, sticking with your SIPs is generally a wise move.

In conclusion, if you’re thinking about starting a SIP, go ahead without worrying too much about the index number. For lump-sum investments, be cautious, as short to medium-term returns can be volatile. In such cases, consider a staggered entry through STPs. Otherwise, opt for multi-asset or auto-allocation funds that adjust the mix of stocks and bonds based on market conditions. Remember, investing is a journey, not a one-time event, and thoughtful strategies can help you make the most of it.

(The author is vice-president & head- distributor marketing at DSP Mutual Fund)

Disclaimer: The views expressed above are personal opinions. The information provided in this article is for informational purposes only and should not be considered as financial advice. It is recommended to consult with a qualified financial professional and tax consultant before making any investment or financial decisions. Mutual Fund investments are subject to market risks, and it is important to read all scheme-related documents carefully.

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