Whenever the equity market witnesses a sudden dip a lot of investors wonder whether it is the right time to enter the market. Of course, when you enter the market is important and a lot of young investors make this rookie mistake. They end up investing when the markets are all time high thinking that this is the best time to enter the market. However, when the markets are high, they are bound to go down and this is what a lot of investors fail to understand. Since a lot of investors fear entering the equity market through direct stock investment, some of them choose the route of mutual funds.
A lot of financial advisors recommend mutual funds since these are a pool of professionally managed funds that invest across several stocks and build a diversified portfolio. Mutual funds like equity funds can be a great investment choice for those who do not invest in the equity market but wish to avoid the concentration risk. However, should retail investors consider timing the market when investing in market linked schemes like equity funds as well?
Is timing the market crucial in mutual funds?
Yes, timing the market is always important for investors especially if you are planning on adding equity funds to your investment portfolio. Since equity mutual funds invest in a variety of stocks the returns that they generate are linked to the stock market. Whenever the stock markets are high, the net asset value (NAV) of the equity funds is also high. So, if you make a lumpsum investment at that time you will receive fewer units as opposed to those who invest in equity funds when the markets are witnessing a dip.
However, for a common man, it is almost impossible to predict the market that is highly volatile and constantly faces fluctuations. Now you may argue that you can enter the markets when they are low. However, there is no definite way to measure a market’s low as even in underperforming markets there are some stocks that are performing and delivering exceptional returns. So, it all depends on the stocks which the fund manager chooses. Even if globally the markets witness a sell-off there are no definite reasons which may deem equity markets to be failing.
What is the best way to enter the market with mutual funds?
Since it is difficult to even for seasoned investors to predict the market, the best way for retail investors to start their mutual fund journey is through the Systematic Investment Plan. A Systematic Investment Plan is a simple and easy way to invest in market linked schemes like equity funds. Investors can use the SIP calculator to break down their total corpus required to achieve their ultimate financial goal and then to invest this sum periodically in a mutual fund scheme of their choice.
The primary reason to start a SIP in mutual funds is rupee cost averaging. Since the markets fluctuate almost every day, investors can buy units based on the NAV. Whenever the NAV is low investors can buy more units and vice versa. In the long run, investors are able to buy more units. This not only averages out their total cost of purchase but reduces the overall investment amount while maximizing profits in the long run.
Another reason to invest in mutual funds via SIP is the power of compounding. Through compounding, investors can compound their small SIP sums and turn them into one large corpus in the long run. The compounding effect can only be witnessed by those who remain invested in mutual funds through SIP for the long haul.