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What is a good time to invest in mutual funds?
Timing is crucial for any investment. And this is particularly true if the market of the asset you are investing in is volatile and subject to many changes and price fluctuations. So, if you are planning to invest in mutual funds, you will undoubtedly be curious about the right time to get started. Entering the market at the wrong time can make it harder for you to achieve your investment goals, isn’t it?
So, what is the best time to invest in mutual funds?
This is a tricky question to answer, primarily because it is practically impossible to predict the lows and the highs of the market. Take the case of the market movements in the year 2020. The onset of the pandemic made the Indian markets crash by over 1000 points. And then, just when people least expected it, the market rallied and has been bullish ever since, despite a couple of more waves of the pandemic outbreak.
So, the bottomline is that it is not possible to predict how the market will move. The best experts can do is make projections about how the market will probably react to developments that are expected to happen. This brings us to the question of the best time to invest in mutual funds, which often have portfolios of market-linked instruments.
The truth is, there is no right time to invest in mutual funds. Conventionally, you may be tempted to think that it is best to invest when the value of the mutual funds is at a low. So, once the value bounces back up, you can benefit from the gains. However, there is no way to predict if the value will fall further once you have invested. And if the market crashes after you invest, you could lose most or all of your capital.
Clearly, timing the market is the wrong way to go about it, and one wrong investment decision could lead to massive losses. Instead, mutual funds offer an easy and effective alternative to timing the market - namely the Systematic Investment Plan (SIP).
What is a Systematic Investment Plan?
Commonly known as an SIP, a Systematic Investment Plan is an investment strategy that allows you to invest in mutual funds in a consistent and disciplined manner. Here, you essentially invest a fixed sum of money in the mutual fund of your choice periodically. The investment amount can be as low as Rs. 500, and you can choose to invest on a weekly, monthly, quarterly, half-yearly or annual basis.
Investing in mutual funds via an SIP gives you many advantages. Here is a closer look at how SIPs eliminate the need to time the market and benefit you in many ways.
You get the advantage of the power of compounding
Remember how the gains from your mutual fund investments are reinvested in your portfolio in the case of growth funds. This triggers the power of compounding, which essentially allows you to earn returns on your returns. The power of compounding also works better over the long term, and SIPs can help you here, since it is easier to remain consistent over the long run if you are investing only small amounts periodically.
For instance, say you invest Rs. 1,000 monthly and do so for 10 years. The expected rate of returns is, say 8% per annum. In this case, your investments will grow to Rs. 1.84 lakhs.
However, if you remain invested for another 10 years, even without contributing anything to your portfolio, your investments will grow to Rs. 3.98 lakhs.
Rupee cost averaging works in your favor
SIPs also give you the advantage of rupee cost averaging. This essentially means that when you invest periodically, you can buy more units in the scheme when the NAV is lower, and fewer units when the NAV is higher. This averages out your investment costs over the long term and helps you tide over market volatility simultaneously.
You can start investing without a lump sum amount
Another major advantage of opting for an SIP is that you do not need to wait until you have a lump sum amount to start investing. With as little as Rs. 500 a month, you can include mutual funds in your portfolio.
You don’t need to time the market
Above all, with a Systematic Investment Plan in place, you do not need to time the market and identify the right entry point. This eliminates all the guesswork from the equation and allows you to invest consistently.
Things to keep in mind when deciding on the right time to invest in mutual funds
Starting a mutual funds SIP is a great way to work around the idea of finding the perfect time to invest in the mutual fund markets. That said, there are some other key things that you need to keep in mind when you are looking for the right time to invest.
Start your investments as early as you can
Getting a head start with your mutual fund investments gives your capital more time to grow. The power of compounding also works best over the long term. So, it is always a good idea to start investing as early as you can.
Keep your investment horizon in sight
Although a long-term outlook is advised for volatile asset portfolios, you also need to be mindful of your goals and the time within which you need to achieve them. So, you need to time your investments in such a way that your money has adequate time to grow. Investing too late for a massive goal will lead to unreasonable expectations from your portfolio, and will only set you up for disappointments.
Invest regularly and in a diligent manner
Above all, remember to invest consistently and diligently, even if your portfolio may see a dip during a few months. This is especially true if you are investing with a long-term outlook, since volatility tends to iron itself out over time.
While there is no right time to start investing in mutual funds, it is always a smart idea to start as early as possible. And once you’ve got that sorted out, the next thing you need to focus on is which mutual fund to invest in. Wondering how you can find out what is a good mutual fund scheme for your needs? Head to the next chapter to find out how you can do this.
A quick recap
- The bottomline is that it is not possible to predict how the market will move. The best experts can do is make projections about how the market will probably react to developments that are expected to happen.
- So, there is no right time to invest in mutual funds.
- Conventionally, you may be tempted to think that it is best to invest when the value of the mutual funds is at a low. But if the market crashes after you invest, you could lose most or all of your capital.
- Mutual funds offer an easy and effective alternative to timing the market - namely the Systematic Investment Plan (SIP).
- A Systematic Investment Plan is an investment strategy that allows you to invest in mutual funds in a consistent and disciplined manner. Here, you essentially invest a fixed sum of money in the mutual fund of your choice periodically.
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