How to deal with the bull run in equities

The Indian stock market has witnessed impressive gains this year with the Sensex crossing the 71,000 mark.

- Sudipta Mitu

Market experts anticipate this upward trend to persist, driven by favourable conditions such as a decline in interest rates (globally and in India) next year and stable domestic growth. Investors, however, face a conundrum: whether to continue investing in equities amid rising valuations, cut back on their holdings, or exit entirely.

Avoid excessive allocation In a buoyant market, investors succumb to the temptation to invest excessively in equity mutual funds. They project past returns into the future and believe they should try to maximise their gains. So, they tilt a large part of their portfolios towards equities.

Based on their recent strong performance, many investors are also allocating more money to mid- and small-cap funds. Some are even making lump sum investments in the quest for higher gains. These mistakes must be avoided. If the equity market corrects, such actions could result in heavy losses.

Don’t exit equities  Completely avoiding equities is also not an option. If you exit equity funds altogether, you could miss out on potential market gains. A market which is in a bull run can continue to rise for a long time, long after investors feel it has become overvalued. In any case, equities play a crucial role in long-term wealth creation, so exiting them entirely is not an option.