When is the right time to enter mutual funds?

A million dollar question which people tend to ask before investing is, “when is the right time to invest in mutual fund/equity market?” Conventional wisdom says – enter when the markets are low or enter when P/E ratio falls below a certain threshold so on. Multiple theories advocate right time of investing. The fear is “what if I invest and market crashes after I invest?”, in such cases portfolio would be under loss.

Let’s assume, few of our investors were accurate in predicting the market lows and invested in Sensex/index fund right at bottom of the market in the given period. Let’s say some of the investors got carried away with the Bull Run and invested Growth Fund at the market peak.

The process of wealth creation requires patience and discipline. In Short term investment horizon, the performance of the portfolio can be extreme, but in long term the performance normalizes. Irrespective of the time of entry, to reap the benefits in equity markets an Investor should stay invested for at least 7 to 10 years or more. In the long run, equity investments have always out performed inflation consistently. Investing in mutual funds, would add the benefit of active fund management and tends to outperform the benchmark (normally Sensex/Nifty incase of large cap funds) in the long run.

When you are looking at achieving long term financial goals, there is no right or wrong time to enter the market. Start today!

FIGHT MARKET VOLATILITY BY INVESTING SYSTEMATICALLY

Indian stock markets have been pretty volatile. The uncertainty is such that markets can take a plunge in one day and rise up again on the very next day. Investors who have invested in mutual funds through the SIP route have been successful in negating the uncertainties caused due to stock market fluctuations to a large extent.

Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) are two different routes of investing in mutual fund in discipline and systematic manner. SIP as well STP is possible in all kind of open ended schemes whether equity, non-equity or balance MF schemes. Equity is more volatile in nature and hence, more and more people invest in equity scheme through SIP or STP route.

Systematic Investment Plans

Under this method, one invests a fixed amount in a mutual fund scheme regularly on a particular date of every month. Benefit of investing through SIP is that one does not have to time the market. There are consistent deposits which lead to investing in the high as well as low market that help you make the best out of the overall opportunities that were not easy to predict in advance. The investors are required to submit onetime request for regular investment in the particular scheme of mutual fund.

A number of advantages one has while investing through the SIP. The essential benefit is having a dedicated and focused approach towards investment. Though there is a tremendous enthusiasm when people enter into the investment markets but fail to make regular investments. However, this plan reduces the burden later on as there is a predefined condition of investing a specific amount every month. So, one achieves an investment discipline. Also, one enjoys investment convenience. Another big advantage is rupee cost averaging. Because you get more units when market is down and lesser units when market is up, it helps to overcome risk of volatility and helps you generating better returns in long term.

So, the SIP system works where you have money in your bank account, and every month a fixed sum is transferred from your bank to the mutual funds.

Systematic Transfer Plans 

Systematic transfer plans (STPs) are suitable for investors who have a lump sum amount to invest, but want to proceed with the SIP way. STP has features and benefits similar to a Systematic Investment Plan. Only difference is that unlike SIP where the fixed amount is debited form investor’s bank account on a predetermined date to be invested in a scheme of a mutual fund, here investor parks a lump-sum amount in a less volatile scheme like liquid or money market mutual fund and gives a standing instruction to the fund house to transfer a fixed amount on a predetermined date in another scheme of the same fund house.

So, the STP system involves investing a whole sum of money in mutual funds, mostly a liquid fund and selling some units of the same to further investing in equity mutual funds.

A frequent question asked by investors who wish to invest through SIP is the time frame of investment. Your financial goals and priorities should be considered before deciding on the time frame of your SIP. Equity has potential to deliver higher returns in long term hence it makes sense investing in Equity Mutual Fund schemes for five years and more. Also, real benefit of rupee cost averaging can be observed only in long term. A SIP offers the double benefit of negating the market volatility and combating the unpredictability in rupee value while gaining optimum benefits from the equity markets. A SIP guarantees a disciplined investment irrespective of the market swings and helps you to reap from the benefits of compounding.

Why you should invest in multiple funds to mitigate portfolio risk?

Many investors, especially those new to mutual funds, tend to invest their entire surplus in just one mutual fund scheme. This concentrates their investment risk with just one fund management team. Having funds of different market capitalisations and investing styles would provide adequate diversification across assets, sectors and stocks.

Moreover, investing in a single fund might not generate optimal returns as funds that deliver outstanding returns in the long term may deliver lower or negative returns in the short term, and vice versa.

Mutual funds are a great tool for diversification, many investors think that once they put their money into a mutual fund their work is over, but for a fact this is not the case, their work just starts as even in mutual funds sufficient diversification is required. For example You may invest in 4 different mutual funds, but it does no good if they all have similar holdings, that is a portfolio which is highly correlated with each other. In this case, you are not actually diversifying because if something affects the securities in one fund, it will also affect the other fund. In this case, you will be holding the same amount of risk which a single fund would have to your portfolio, which in proper diversification can be reduced.

If you want to truly diversify your portfolio, then you need to invest in mutual funds that are not correlated to each other in performance. You can do this by considering which asset holdings your current fund has and based on that try to spread your money so that no asset with similar features are repeated in your next fund.

You should always remember that the diversification towards any investment should be done in exactly the way it demands in a said particular situation. Doing too much of diversification will also not serve any great purpose because the stocks present in different-different schemes will be more or less similar. However, the performance of schemes varies as it depends on the call taken by respective fund managers holding their particular schemes.

Hence, it is advisable to take adviser’s help before taking any step of doing investments in mutual funds.