Things to take care of while investing in mutual funds at market peaks

As an investor, you always want to make profitable financial decisions. However, the market is unpredictable and investing at the wrong time or not being cautious can backfire too. This is particularly true during market peaks, where the risk of a significant dip in the market is higher than ever before.

A market peak is when the prices of securities are at their highest and the market has reached a certain level. These peaks often create a sense of urgency for investors who rush to buy stocks and mutual funds out of fear of missing out on a big opportunity. However, the prices can change anytime, followed by downturns, corrections, or even financial crises which can wipe out a huge portion of your investment. 

Knowing what to do during market peaks can help you avoid costly mistakes and maximise your mutual fund returns. Having said that, let’s learn about diversification, risk management, market analysis and other strategies to make right investment decisions during market peaks. 

1. Start an SIP to avoid emotional based investing

With market peaks, it is easy to get influenced by the hype and make impulsive investment decisions. To avoid this, it is advisable to start a systematic investment plan (SIP) rather than investing a lump sum amount. SIPs encourage disciplined investment which reduces the impact of market volatility. 

Let’s say you have a lump sum amount of Rs. 5 lakhs to invest in mutual funds online. If you invest this amount during a market peak, your investment value may significantly drop if there is a market correction. However, if opt for an SIP, you could invest Rs. 50,000 every month for ten months while taking advantage of the lower unit costs when the market declines. 

This approach helps you build a profitable mutual fund portfolio over time and reduce the risk of major losses during market volatility.

2. Avoid overinvesting in one single fund and diversify

It can be tempting to invest in a high performing mutual fund during market peaks. But the truth is that this can put you at risk if that fund underperforms. Instead, diversify your investments across different types of mutual funds with varying risk profiles, return rates, and strategies to mitigate risk and increase your total returns. This could include a mix of equity, bond, gold funds, ETFs, and index funds. 

3. Keep a long-term approach

It is crucial to keep a long-term approach with mutual funds investment. This means you should resist the temptation to invest all your money at once or sell off your investments for quick gains. Instead, holding onto your mutual funds for at least 5-7 years will allow the market to average out its fluctuations over time. 

Also, the power of compounding works over time, as the returns on investments are reinvested and added to the original principal amount. This not only increases the initial investment but also generates returns on the gains. So, even a small investment in mutual funds can turn into a huge amount over a long holding period.

4. Take financial guidance

Financial experts have in-depth knowledge of the market and analytical skills to help investors invest wisely during market peaks. They can help you identify the best mutual funds to invest in as per your risk appetite, age, current finances, market trends, and long term goals. 

Right professional guidance helps investors stay focused on their investment goals and avoid impulsive decisions triggered by market fluctuations. They can also help investors monitor their investments, adjust their asset allocation, and buy/sell securities based on the market’s performance. 

Ending notes

Investing is a long-term process and needs strategic planning and a clear vision of your goals. Thus, your investment decisions should reflect your set targets, and it is important to avoid making impulsive decisions based only on market trends. Always prioritise your financial wellbeing over temporary market events and make informed decisions based on data and research.