When to Invest in Mutual Funds?

When to Invest in Mutual Funds

Mutual funds are professionally managed investments that combine the money of several private and institutional investors who share a common set of investing goals.

The combined investment is utilized to purchase capital goods. Fund managers are individuals who handle mutual funds professionally.

Do you need clarification on the ideal moment to invest in mutual funds? There are better strategies than trying to time the market and invest.

Aiming to purchase low and sell high is a common goal. But how many of us are successful in carrying this out correctly?

The timing of your entry into the market is essential when using investment options like stock. A common mistake new investors make is failing to recognize the market’s optimal entry and exit points.

They frequently invest when the market is already at its height and are forced to sell at a loss when values drop shortly after.

Mutual fund investments have grown over the past ten years. India is moving away from standard investing options and using mutual funds to meet its financial objectives.

Some investors are still determining the best time to invest in mutual funds. This page is intended to help you meet your needs.

When Should You Invest in Mutual Funds?

Mutual funds have grown incredibly popular among investors because of their flexibility. Mutual fund investing is gaining popularity due to the availability of different fund categories that suit investors with all risk profiles.

The ideal moment to invest in mutual funds is not determined by hard and fast rules or criteria.

While a bear market may appear to be a great moment to invest in mutual funds, identifying a bear market depends on the fund manager’s experience.

You don’t have to worry about market timing when investing in mutual funds. This is because you can invest a certain amount with mutual funds regularly. 

You can invest the necessary amount each month, quarter, year, etc., with Systematic Investment Plans (SIPs). Regular investing eliminates the need to time the market.

Catching the money at a lower NAV is always preferable to paying a greater price. It will increase wealth accumulation as well as enhance your rewards. Investments in mutual funds are suitable in the following three situations:

  • According to your life goals, select each mutual fund in your portfolio.
  • The choice of securities (equity, debt, or a combination of the two) decides the returns, not the NAV.
  • A SIP is the best option if you have a steady income; otherwise, you can opt for a lump sum.

You can control market volatility by investing regularly. Do not postpone your investment any longer. Your potential for greater growth increases with the speed of your investment.

For a better understanding, let’s look at an example. Assume Mr. X began investing for his retirement at the age of 25. While Mr. Y begins his retirement investments when he is 30 years old. 

They both make equal returns on their investments in the same fund. They invest Rs. 5,000 each month. Let’s see how much money they make at the end of their investment period.

Particulars

Mr. X

Mr. Y

Monthly Investment Amount

₹5,000

₹5,000

Investment Tenure

35 Years

30 Years

Return*

12%

12%

Maturity Amount

₹3,24,76,345

₹1,76,49,569

Note: 12% annual return on investment portfolio is used to determine the maturity amount.

You can see from the above table that Mr. X created an additional return of roughly Rs. 1.5 Cr. by beginning his investments five years earlier. When your investing horizon is longer, you may personally witness how the power of compounding works.

As a result, don’t delay your investments. Invest immediately. To benefit from the power of compounding, have a long-term investing horizon.

Things to Consider When Investing in Mutual Funds:

The following considerations must be made while investing in mutual funds:

Market Positioning: 

Risk-averse investors should consider investing after the market has corrected, as markets try to regain their losses after a fall. Investors willing to take on many risks can invest at any time since they will profit greatly from all market declines and cycles.

Investment Goal:

Always choose a goal to invest in when you’re investing. In other words, choosing the appropriate funds for your investments will be easier if you invest with a specific goal in mind and a defined financial goal.

For example, you can buy a car, start a retirement fund, fund your higher education, or purchase a house. The investment goal might be anything, but you must first decide how much money you want to save to achieve it.

Risk Tolerance:

The investment amount and length will differ depending on the investor’s risk profile. Although PPFs and FDs are risk-free, they only offer modest or moderate returns. Investing with high profits has a higher risk, in general.

Equities mutual funds are considered high-risk investment options because, by investing in equity, they seek to outperform other types of mutual funds in terms of returns.

In contrast to equity schemes, debt mutual funds are low-risk investments. These funds make investments in debt instruments, which are less prone to volatility than equity schemes.

Return on Investment:

Investors willing to take on significant risks in return for high returns may consider investing in equities. If investors have a large amount of money sitting in their savings account, they can invest it all at once in mutual funds.

They may invest in SIPs if they are prepared to make regular, recurring investments of a certain amount. For both of these, the investor must hold the investment for a minimum of three to five years to receive high returns.

Mode of Investment:

Mutual fund investments can be made in one go or over time using SIPs. Lump sum investing is when you make a major investment in a fund all at once. On the other hand, SIP investing enables you to make regular, fixed-amount investments.

You don’t have to stress about scheduling your investments with SIP investing. Regularly investing small amounts will enable you to build a significant corpus over time. SIP investing allows you to accumulate the necessary capital gradually.

Tax Benefits:

You must be cautious about the tax implications when choosing an investment asset. Based on the holding period and type of fund, capital gains from investments in mutual funds are taxed.

Taxpayers are eligible for tax deductions of up to Rs 1.5 lakh per year under Section 80C of the Income Tax Act of 1961.

When this provision is used properly, fund houses can offer tax-saving choices through the ELSS scheme, which has the shortest lock-in duration of all the Section 80C investment options at 3 years.

Short-term vs Long-term Horizon:

Every investor should consider their investment horizon while assessing their risk profile and financial goals before investing in a specific fund.

The investment horizons could be either long-term or short-term, depending on the risk-return potential.

Long-term investments produce better returns than short-term investments since the risk is higher. Short-term investments, on the other hand, follow the low-risk, low-return concept. 

One can make short-term investments in liquid or ultra-short-term funds. The investor can make a lump sum or SIP investment for long-term investments.

To sum up, there are a variety of factors that make investing in mutual funds a sensible choice. No matter the time of year, one can invest with the right advisory, instruction, and guidance on selection, performance, and fund returns.

Conclusion:

Do you still wonder whether now is the correct time to invest in mutual funds? Without a doubt, yes. You can invest the desired monthly amount without worrying about managing your money with mutual funds.

Divide your investment amount into equal portions and make monthly investments if timing your investment is an issue. Instead of going through this procedure, you might begin a SIP in a mutual fund of your choice.

To balance out market volatility, you must keep your investments for the long run. Additionally, rather than monitoring market sentiment and attempting to time your entry and exit, you should concentrate on choosing appropriate funds for your financial goal and investing consistently.

Ashkar Gomez

Ashkar Gomez has rich experience in financial planning, management, Risk analysis in the equity and debt market. They completely advise on Value Investing.