After reaching an all-time high earlier this month, the stock market benchmark indices retraced around 3% over the next few days, only to be followed by a 2% rally. Since then it has been a 1% flip flop in either direction for benchmark indices. Lack of clear direction for market indices can be confusing for equity investors. Valuations are high, when seen in the context of (along with uncertainties on) earnings, macroeconomic factors and other external factors.
Whether you are a first-time investor or have been invested for a few years, confusing times call for a quick check. Here are the basics you need to look at.
Use this time to rebalance your asset allocation. If you have been invested in the market for at least a few years, its likely that your equity portfolio has unrealized gains. Such gains would have pushed up your equity allocation in the overall portfolio by some margin.
Given the high market valuations, you can consider booking some profits in equity and rebalancing your asset allocation back to the original level where you started.
If you are a new investor and equity returns are lagging— consequently lowering your allocation—use the correction to add and bring your equity allocation up to the desired level. Given that predicting market behaviour daily is not possible, add transactions in a staggered manner.
Systematic investment plans
Ideally, systematic investments made every month are best suited for long-term investments, which means being invested for at least 5- 7 years.
By investing every month, you can capture the market corrections as well.
Regular investing smoothens out the short-term volatility, but to see its impact, one must continue with the strategy and remain invested for a long period.
Stopping the investments during a market correction can be counterproductive.
For lump sum investments, you also have the option of choosing a systematic transfer plan, if you are uncertain about investing the entire amount in one go.
Systematic withdrawal plans
If you have started a systematic withdrawal plan in an equity-oriented fund for regular income, market corrections can be tricky. If the correction is gradual, your fund may still be able to withdraw the defined amount from profits made each month. If the correction is sharp, then continuing to withdraw systematically each month can eat into your principal amount. Ideally, you want to avoid such a situation. In times of correction, reassess your need for a systematic withdrawal plan.
Other than your SIPs, consider all fresh investments from an asset allocation perspective. Invest so that your strategic long-term allocation is maintained. If you don’t want to rush into equity now, stagger the investments or use systematic transfer plans. If you are primarily an equity investor with surplus to invest, ensure that you stick to good-quality, high-earnings stocks rather than going with a trend. Stocks prices of companies with certain visibility in earnings growth tend to fall relatively less in a market correction.