The Hindu Business Line : Is it the right time?

With the Sensex at its peak, is this the right time to invest in an equity fund? Is there a possibility of appreciation from this level? Is it advisable to take a systematic investment plan? Should I invest in a tax saving fund, even if I don't have any income tax liability?

Vivek Desai

Belgaum

The timing of your investment in an equity fund does play a big role in determining the returns that you will earn from it.

A sum of Rs 1,000 invested in Franklin India Bluechip Fund, a top performing equity fund at the height of the bull market in December 1999 would have grown to just Rs 1,240 by now. If you had put off the investment and taken exposures in the more sober market conditions of December 2001, your investment would have appreciated more than threefold to Rs 3,400. It is difficult to time the investment so precisely.

The problem with timing is that it is quite difficult to tell in advance, if the market is set for a secular rally or for a sharp correction.

Staying away from stocks (and from equity funds) in the hope of catching the markets just at the right time, may lead to lost opportunities. Especially if stocks continue to be propelled upward by robust economic growth, liquidity or corporate fundamentals, as has happened over the past year.

Using absolute levels of the Sensex to make this decision only heightens these risks. Remember that even a Sensex level of 4500 appeared when the markets were recovering from a low of 2900 in 2001!

This apart, there may several undervalued stocks and investment opportunities outside of the index, which a good fund manager may exploit to beat the Sensex or the Nifty.

If you had stayed away from equity funds in January 2004 because the Sensex was hovering at the 6000-mark, you've missed out an opportunity to earn a return of 30-40 per cent.

This is what good diversified equity funds have earned since last January, though the Sensex/Nifty rose by just 11-12 per cent.

But do remember that investing in stocks or equity funds after a secular run-up in stock prices, is infinitely more risky than investing in them in the midst of a bear market. You should devote careful thought to what proportion of your savings you want to invest in an equity fund. The following pointers could be of use:

Don't invest any part of your savings that you absolutely need over the next 3-5 years in equity funds. A window of 3-5 years may not be enough for stock prices to recoup sufficiently if there is a sharp decline in values.

Is there a part of your savings, where you can handle a temporary decline of 20-30 per cent in value? Allocate that part to equity funds.

Stick to diversified equity funds (such as the HDFC Top 200 Fund, Franklin Bluechip or Templeton India Growth Fund) that have already weathered the bull and bear phases of the market over a five-year period.

Invest through a systematic investment plan, so that you do not risk a big chunk of your savings to the market levels prevailing at the time of investment.

If you observe these in a disciplined manner and remain invested for at least a five-year period, you may have a reasonable chance of earning an annual return of 10-15 per cent on your equity funds over the long term.

You can consider tax saving schemes with a good track record (funds such as HDFC Long Term Advantage, HDFC TaxSaver and Alliance Capital Tax Relief), even if you are not liable to pay income-tax.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859/860 Anna Salai, Chennai 600002.

Aarati Krishnan

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Is it the right time?