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  • What should MF investors do in an overvalued market?

    Quote by Rajeev Thakkar in The Economic Times Wealth, February 16, 2017

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    What should MF investors do in an overvalued market?

    Some investment experts believe the markets are currently overvalued. They are asking their clients to book profits and shift the money to debt immediately.

    "I consider a Nifty PE of around 16 as a fair average. But, at the moment it is around 22," says Abhishek Gupta, founder and chief financial planner, Moat Wealth Advisors. Nifty Price Earning Ratio (P/E ratio) measures the average PE ratio of the companies in the index. A Nifty P/E ratio of 22 means that nifty is trading at 22 times of its earnings.

    Gupta feels that a PE of 22 is quite high and the markets may correct in the near future.

    Rajeev Thakkar, CIO, PPFAS Mutual fund also feels that the stock markets are trading at the above average level.

    "If you are 100 per cent invested in equity, move 20 per cent of the corpus to debt immediately," says Gupta. "You can consider investing the proceeds back in equity when the market falls or the PE is close to 16," he adds.

    This is what many market pundits ask investors to do when the market is overvalued. Take the money out of the market (sell your investments and book profits), sit on cash and wait for the markets to fall before getting back to it. They believe that this strategy would help investors to maximise profits.

    However, the big question is whether a regular investor will have the time to do all this? Also, isn't it what the fund manger is supposed to do in a mutual fund - buy and sell stocks to maximse profits?

    That is why Rajeev Thakkar believes that investors should focus on their asset allocation and stay invested with a quality mutual fund. They should let the fund manager take care of all the uncertainties. He also adds that an investor should be concernend with the valuation of the individual stock rather than reacting to the valuation of the overall stock market.

    Continue with your investments and stagger your new investments over a period to avoid getting trapped at a particular level in the market. "If you have a lumpsum amount to invest, spread it over a period of 12 months through a Systematic Transfer Plan," says Gupta.

    The main idea of investing in a systematic manner is to avoid catching the market at a wrong time - that is, buying stocks when they are trading at a higher level. Spreading the investment over a period of time averages the cost of purchase and hence you need not worry whether the market is at a higher level or at a lower level. "There is no need of postponing your investment plans in equity mutual funds but you should invest only via STP or SIP route," says Deepali Thorat, a certified financial planner based in Mumbai.

    The original article could be seen here.

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