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When is it the Correct Time to Invest in Mutual Funds?

Updated on May 3, 2016

When is it the Correct Time to Invest in Mutual Funds?

The Indian mutual fund industry’s assets under management (AUM) grew 14% in 2015-16 to Rs.13.53 lakh crores, according to an article on the profit.ndtv.com website. The number of investor accounts grew by 53 lakhs in the same period, taking the total number of these accounts to a record-breaking 4.7 crores. The strong growth in AUM came from large inflows into equity mutual funds and increased participation from the small towns. The AUM grew for 32 of the 43 mutual fund houses in India; the remaining 11 mutual fund houses saw a drop in their AUMs. The Securities and Exchange Board of India (SEBI) is the body that regulates mutual funds. Several measures taken by SEBI to encourage mutual fund houses to expand to smaller towns have helped in the growth of AUM in 2015-16.

Investments in Mutual Funds: Timing

People tend to invest in mutual funds when the stock markets are doing well. However, as an article on moneycontrol.com says, “unlike popular wisdom, it is actually a good time to invest in the stock markets (via mutual funds) when the markets are down. The worse the markets are, the better returns you are likely to get in the medium to long term.” Thus, a good time to buy mutual fund units is when the markets are down; when stock prices decline, the net asset value (NAV) of mutual funds will also decline. Investors can purchase more units at low NAVs compared to when the NAVs start climbing.

Systematic Investment Plan (SIP)

It may not always be possible for investors to time the market. Instead, investors can opt for investing via the SIP option. An SIP is a facility that allows investors to invest in the mutual funds of their choice at regular intervals, usually monthly or quarterly. Instead of investing a lump sum, the investor can space out the investment over a period of time. This has the advantage of reducing the average cost of the mutual fund; when the NAV is low, the investor picks up more units, and when the NAV is low, the investor will obtain fewer units, say experts at Birla SunLife Mutual Funds.

Evidence that SIPs Work

The Mint worked on a study to check the returns that SIPs have delivered over a 5-year, 7-year and 10-year horizon, along with Hexagon Wealth, a boutique wealth management firm based in Bangalore. The results were reported in an article on the livemint.com website. The study chose 15 diversified equity schemes, and calculated rolling returns over the specified 5-year, 7=year and 10-year horizons. Rolling returns were used so as to take into account several time periods and the multiple times that different investors enter and exit from mutual fund investments. Over a 5-year period, eight of the fifteen schemes gave returns higher than 6% at least 90% of the time. Over the 10-year horizon, all the funds gave returns higher than 6% at least 96% of the time. In fact, twelve of the fifteen equity schemes gave returns higher than 6% at all times. The investor education platform janotohmano.com provides a mutual fund SIP calculator for investors to figure out how SIPs can work for them.

Other Aspects of Investing in Mutual Funds

Investors will need to do research in order to figure out which mutual funds to buy. According to an article on businesstoday.in, first-time investors should look at balanced funds, large-cap funds, index funds and tax-saving funds in the category of equity mutual funds. All these varieties of equity mutual funds are moderate to low risk, ideal for the first-time investor.

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