Is it Right Time to Invest in Mutual Funds? Know the Best Time to Invest in Mutual Funds

With investment options such as equity, the timing of your entrance into the market is of prime importance. A common mistake new investors make is that they miss the market’s ideal entry and exit points. They tend to invest when the market is already at the peak of the bull market and are forced to sell at a loss when the prices crash in the near future. To tackle this volatility aspect of the market, risk-averse investors look towards Mutual Funds as a viable option. It provides them access to stock picks of professionals who have the knowledge and experience to make the right decisions on their behalf.

However, should an investor also consider the timing of their investment when they are investing in mutual funds?

Is timing important in Mutual Funds?

The timing of investment plays a significant role in mutual fund investments, especially in equity funds or funds with considerable equity exposure. The returns from such funds are directly linked to the equity markets, which demands an ideal entry and exit point to earn good returns. As a result, if the markets are hitting new highs, the Net Asset Value (NAVs) of these funds would be higher.

However, it is almost impossible for inexperienced investors to identify the lows and highs of the market accurately as it becomes tough even for professional fund managers. Sticking to the predetermined investment strategy by the fund managers becomes the key to successful timing and good returns in mutual funds.

What is the best time to invest in Mutual Funds?

There is no rule of thumb or fixed criteria to state the best time for investing in mutual funds. While a bear market may look like an ideal time to invest in mutual funds, the identification of a bear market entirely depends on the expertise of the fund manager. For investors, the best thing to do in the case of investing in equity funds is to divide the investment amount into equal parts and then invest the same in the fund of your choice at fixed intervals. This will eliminate the need to time the market or think about the tops and bottoms.

Going the SIP way

With Systematic Investment Plan (SIPs), you get to select a fixed amount that you want to invest in the fund of your choice at regular intervals. The interval could be monthly, quarterly, biannual, or annual. With most schemes, you can get started with as little as Rs. 500/month. SIPs can allow you to significantly lower the overall risk and average out the losses in the long term. It can also improve the profit potential overtime for the investors.

Rupee Cost Averaging in Mutual Funds SIPs

One of the reasons why SIPs are an excellent option is rupee cost averaging. Here is an example for a better understanding:

Let us assume that you start a SIP of Rs. 5,000 in an equity scheme whose NAV is currently Rs. 30. Nifty, the most significant index of the Indian equity markets, is currently at 10,000. For one year, this is how the market and your SIPs might work-

Month SIP Amount Nifty Equity Fund NAV Fund Units
January Rs. 5,000 10,000 Rs. 30 166.66
February Rs. 5,000 10,100 Rs. 32 156.25
March Rs. 5,000 10,200 Rs. 34 147.05
April Rs. 5,000 10,100 Rs. 32 156.25
May Rs. 5,000 9,900 Rs. 28 178.57
June Rs. 5,000 9,800 Rs. 26 192.30
July Rs. 5,000 9,700 Rs. 24 208.33
August Rs. 5,000 9,900 Rs. 28 178.57
September Rs. 5,000 10,100 Rs. 32 156.25
October Rs. 5,000 10,200 Rs. 34 138.88
November Rs. 5,000 10,300 Rs. 36 147.05
December Rs. 5,000 10,400 Rs. 38 131.57

Note – The above table is only a simple example to help investors understand how RCA works. The market dynamics are more complicated in reality.

So, by the end of the year, you will have 1957.3 units of the fund, with the average cost of 1 unit being Rs. 31.16.

This is how rupee cost averaging works. You keep on investing a fixed amount through SIP and get more units when the markets and NAV are low and fewer units when they are high.

Conclusion: Mutual Funds Investments and timing the market

So, is it the right time to invest in mutual funds? Definitely yes. The markets have fallen considerably, due to which the NAVs of mutual fund schemes have fallen. By investing now, you could generate handsome returns when the markets start rising. However, it is almost impossible to say that the markets won’t fall any further.

If you are concerned about timing your investment, the best thing to do is to divide your investment amount into equal parts and invest at regular intervals. Alternatively, you can skip this process and start a SIP in a mutual fund of your choice. However, it is wise that before investing, you should consider your investment objective, risk appetite, and investment horizon.