While it is always difficult to predict the direction of the markets, what one does know is that at higher levels, the risk to reward ratio begins to turn unfavourable. The Sensex is trading at 23 times trailing earnings and this most analysts have termed as "frothy". The historical average for the Sensex has been 17 times, which means markets are expensive.

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Having said that the better proposition would be the SIP route, as it works on the basis of averages rather than lumpsum investments. In case you want to invest large amounts into equity mutual funds it is best to wait for some decent correction. Markets do not always go up oneway and there are times when they are definitely likely to fall. At such times it would be a good opportunity to invest larger amounts.

Already we are seeing very large amounts of cash pouring into the markets from mutual funds and this is one reason to drive the markets. However, at the slightest hints of a collapse in the markets there could be swift withdrawals from mutual funds, aggravating the situation.

Caution is hence advised in direct equity investments and also equity mutual funds. One can move some profits from equity mutual funds to debt funds and return back when markets drop sharply.

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