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Is it time to stop investing in equity mutual fund schemes? – Economic Times

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Many DIY or Do-It-Yourself investors are ready to give up on equity mutual funds. They believe that it doesn’t make sense to bet on equity mutual funds as the stock market is likely to be comatose in the next two or three years. They have come up with a solution to the issue: invest the money instead in debt mutual funds.

This is how a DIY investor explained the situation: I am stopping my regular investments in equity mutual funds. I have decided to invest in some medium duration schemes this year. What is the point of investing in equity schemes when the market is going to be flat for the next few years. Unless the government comes up with something concrete, I don’t see the market going anywhere.

Well, it is difficult to predict the market. Sure, many market pundits feel it clearly needs some firm signal from the government – be it in the form of fiscal stimulus or policy inputs. However, is it a sound strategy to stop investments in equity schemes and start those investments in debt mutual funds? Doesn’t it go against the basic principle of SIP investments, buying more units when the market is down and maximise wealth?

Financial planners and mutual fund advisors say investors should stick to their asset allocation plan irrespective of the market conditions. It is not a great idea to base your investment decisions on the basis of the prevailing conditions in the market, they say. Investing when the market is doing well and stopping investments when it is not doing well is another form of trying to time the market and the investor would end up with average return if s/he keeps shifting between one asset class to the other, they warn.

For example, let us say the market is down 10 per cent this year. You stop investing in stocks and start investing in debt mutual funds. You earn 8 per cent returns from debt mutual funds next year and you decide to continue with your investments in debt funds. The very next year, the market goes up 30 per cent, and you decide to start investing again in stocks. What if the market goes down that year by 20 per cent? Will you shift to debt again?

The point is: you will get caught in a vicious cycle of market forces pulling you in different directions. We have taken a simplistic scenario where we only considered firm cues. However, you will have disparate cues – not necessarily all pointing in the same direction – to consider while take a decision in the market.

For example, many investors might interpret the Prime Minister’s interview to The Economic Times and his Independence Day speech as a positive to the stock market. The same day you will read about inverse yield curve that is threatening the economic growth worldwide. As you can see, one is pointing to the revival of the market while the other towards impending doom.

In short, the decision making may not be an easy task and it may also be time consuming. And if the investment pundits are to be believed, the entire exercise may not provide any extraordinary results.