With the massive sell-off in the global markets, can this be the best time to start investing in mutual funds? Read this post to find out.
With investment options such as equity, the timing of your entrance in the market is of prime importance. A common mistake among new investors is that they invest when the markets are already closing in on the top and exit when the markets start falling. It should be the other way around.
For most investors, Mutual funds look a viable option as it provides them access to professionals who have the knowledge and experience to make the right decisions on their behalf. But should an investor also consider the timing of their investment when they are investing in mutual funds?
Does this make the recent sell-off in the global equity markets the best time to invest in mutual funds? Let us have a look:
The timing of investment plays a significant role in mutual fund investments but mostly in equity funds or funds with considerable equity exposure. It is because the returns from such funds are directly linked to the equity markets. So, when the markets are hitting new highs, the NAVs of these funds would be on the higher side.
But with that being said, there is no way a common man could ever accurately point out the lows and highs of the market. Even professional fund managers find this very challenging.
However, sticking to their investment strategy irrespective of the market conditions is what makes mutual funds a preferred investment choice than investing directly into the equity markets.
There is no thumb rule or fixed criteria to state the best time for investing in mutual funds. While it might look like the right time to invest in mutual funds is when the markets are low, there is no yardstick to measure market low.
Agreed that the global equity markets have fallen considerably in the past few months, but there is nothing that suggests the sell-off might not continue in the future too. So, there is no ‘right time’ when it comes to mutual fund investments.
The best thing you could do if you are investing in equity funds is to break down your investment amount in equal parts and then invest the same in the fund of your choice at fixed intervals. This will eliminate the need for you to time the market or think about the tops and bottoms.
The points discussed above are some of the most significant reasons why a large number of investors prefer investing in mutual funds through Systematic Investment Plans (SIPs). With 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, and annual. With most schemes, you can get started with as little as Rs. 500/month.
One of the reasons why SIPs are an excellent option is rupee cost averaging. Let us try to understand this with the help of an example.
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.
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 too. By investing now, you could be able to generate handsome returns when the markets start rising.
But it is almost impossible to say that the markets won’t fall any further. So, 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 manual procedure and start a SIP in the mutual fund of your choice.
Also, do ensure that you also consider your investment objective, risk appetite, and investment horizon before making any investment decision.