Sky-high markets: What you should and shouldn't do

As the market soars to new heights, investors feel a range of emotions - from excitement to anxiety. They find themselves at a crossroads as to what they should do.

It's no surprise that our inboxes get flooded with inquiries from our readers seeking guidance during such times. In this article, we aim to address some of their common questions.

I have idle cash with me. Is investing lump-sum money a good idea when the market is at its peak?

At Value Research, we do not advocate lump-sum investments, regardless of whether the markets are reaching new highs or not. Instead, we recommend spreading your investments through SIPs or systematic investment plans. SIPs help you average your investment cost, mitigate the temptation of timing the market and reduce volatility. Additionally, SIPs promote a disciplined and consistent investment habit.

However, if you want to invest a lump-sum amount, we propose opting for a systematic transfer plan (STP) as a more prudent choice. Click here to explore why.

Should I stop my SIP during market highs and wait to 'buy the dip'?

'Buy the dip' means purchasing units when they have dropped in price and are available at a cheaper price.

However, the resounding advice remains straightforward: time spent in the market is far more important and less complex than timing the market.

Many investors attempt to outsmart market fluctuations with their mutual fund SIPs. They pause their SIP investments when markets soar and resume during downturns. Investing at the bottom can surely be rewarding. But it is a very difficult strategy to execute in real-time.

For example, say you had initiated a Rs 5,000 per month SIP in the Sensex from January 1, 2000, and suspended it for three months each time the market hit an all-time high. You then channelled the withheld amounts into a lump sum investment after three months. In such a case, your portfolio would amount to Rs 95.7 lakh. On the contrary, had you consistently adhered to your SIPs regardless of market conditions, your portfolio would still accumulate to Rs 95.8 lakh.

Thus, pausing and restarting SIPs yields negligible benefits. The lesson here is clear: stick to your investment plan. For further insights, watch this video.

Mid- and small-cap funds have delivered incredible returns in the rally leading up to the market high. Should I sell these funds and book profits?

Small-cap and mid-cap mutual funds have delivered remarkable returns of 45 and 40 per cent, respectively, in 2023.

If you are an accidental investor and are not in it for the long term, selling these funds could be wise. On the other hand, for those with a long-term investment horizon, there is no need to do so. Nevertheless, it's always prudent to rebalance your portfolio.

A commonly recommended strategy involves allocating 50-70 per cent to large-cap funds, 20-30 per cent to mid-cap funds, and 10-20 per cent to small-cap funds. To optimise returns, consider making portfolio rebalancing a regular practice. When small caps experience a surge, consider selling some to align with the recommended allocation as their value in your portfolio increases. For instance, if small caps were 20 per cent of your portfolio initially but grew to 25 or 30 per cent, consider selling to bring them back to the initial allocation of 20 per cent. Conversely, during declines, seize the opportunity to purchase them at discounted prices, thereby maintaining the desired allocation.

Click here to know the exact proportion of small caps in your portfolio.

For more insights, check out this video.

Should I consider shifting towards safer asset classes when the market is at an all-time high?

The decision to shift towards safer asset classes depends on your risk tolerance, expected returns, and time horizon. While it's tempting to react to market highs and move to perceived safer assets, you can potentially miss out on further gains if the market continues to rise.

Therefore, stick to your long-term investment strategy and maintain a diversified portfolio that aligns with your investment goals and risk tolerance. Regularly rebalancing your portfolio to its original asset allocation is important, as it naturally adjusts for market fluctuations. Thus, focus on a disciplined, strategic plan rather than reacting to short-term market movements.

To read more about how to decide your asset allocation, click here.