Financial basis

When is the best time to invest in equity mutual funds? – Forbes Advisor INDIA

The end-of-year curtains are drawn; it’s time to say goodbye to the old and unveil the new year to embrace the new. This is the time to set resolutions and goals for ourselves, which will improve our physical, mental and financial well-being. The first two are health related and we try to track them while ignoring our financial well-being as the year progresses. When we talk about financial well-being, we mean investment decisions.

We don’t think thoughtfully invest in stocks because we try to follow the “buy low, sell high” mantra and don’t. It can be seen that when the markets bottom out, most investors focus on exiting their investments to preserve their capital rather than trying to take advantage of lower prices and deploy additional capital. Or they don’t think long term and postpone their investment.

Common reasons given by investors when they want to avoid or postpone their investment are …

“It’s too late!”

Or “Now is not the right time.”

Or “Why should I invest now?” ”

Or “When should I invest in mutual funds?” “

Or “When is the best time to invest in mutual funds?” “

If you too give these reasons when it comes to investing then you are making a big mistake. Remember that you shouldn’t delay investing; start your investment journey straight away! The best time to start your investment journey, if you haven’t started it already, is “Today”!

Here are some tips to get you started on your investment journey.

1. Don’t delay, it can cost you dearly

When we slow down or avoid investing, we are simply delaying or avoiding successful wealth creation. The delay in investing reduces the power of capitalization as the duration of the investment decreases.

To better understand, let’s see how much three friends – Ajay, Vijay and Ram – would get at the end of their investment tenure. If Ajay starts investing INR 2,000 per month at age 25, for retirement at age 60, and two of his friends, Vijay and Ram, start investing 5 and 15 years later, respectively, then everyone’s future values ​​will be different.

We see in table 1 that the future value decreases with the reduction of the investment period (subtract the age of the person at the retirement age).

Table 1: Effect of investment delay

Even though they all earned the same annual rate of return on their investment, Ajay who started investing early will have by far the largest body of work upon retirement. Therefore, starting the investment journey early is a boon, if you want to build a huge body of work for your financial goals.

In fact, suppose that even if Vijay delays his investment by five years, he invests an additional 1.20 lakh INR per year to catch up with Ajay, and Ram invests 3.60 lakh INR per year to make up for both. Even then, the corpus will be INR 1.11 cr for Vijay and INR 99.05 lakh for Ram, which is less than Ajay’s future value. The difference is nothing more than the cost of the delay.

2. Choose the right asset to deal with volatility and risk

Choosing the right asset is important because it will help you grow your wealth. Equities as an asset class can help you grow your wealth in multiple ways, but with higher returns comes its volatile nature, which investors tend to confuse with risk.

Volatility decreases over time, but risk may not be. The risk is choosing the right product. For example, if you choose a business with poor management, it can be a risk; however the market moves, the stock price may never appreciate.

The Kingfisher Airlines stock is a perfect example (graph 1). The stock in 2006 was at 76 INR, and later in 2007 it peaked near 300+ INR only to drop significantly and never recover. Ultimately, an investor would have lost all of their money because the stock was written off. This is a classic example of a risky proposition that resulted in permanent loss; but it wasn’t volatility.

Graph 1: Kingfisher Airlines Price Movement

Source (Ventura Research)

Now, if you choose a business with good management instead, the price may stagnate and not budge for a very long period of time, but eventually it will pay off. Choosing a management is a risk and the movement of prices is a matter of volatility. Volatility is a market phenomenon and risk is more intrinsic.

For example, Reliance Industries’ price remained in a range of INR 400 to INR 500 from 2010 to January 2017. Later, the stock recovered and maintained its momentum (as shown in Chart 2). The share price increased from INR 544 in February 2017 to INR 2,370.25 in December 2021.

Graph 2: Reliance Industries Price Movement

Source (Ventura Research)

When you choose equity mutual funds, you are investing in a basket of several stocks of various companies. This diversification helps you avoid larger losses when the market gets lukewarm. So even though you still have to deal with volatility, the risk factor is reduced. This is one of the main reasons that mutual funds are an “all season” investment plan.

Equity markets will be inherently volatile. It is a given. In the short term, the volatility will be greater and as the time horizon increases, the volatility decreases.

The best way to understand volatility is to look at sliding returns. In Table 2 below, the maximum and minimum rolling returns over 20-year periods have been used.

This means that if you had invested on any day during that time period and held the investment for a year, your minimum return was -51.70% and the maximum return was 97.32%. As the time period increases, the difference between the two decreases. In the third year, the minimum returns are still negative, but the difference between the negative and positive maximum returns narrows.

In addition, in the 5e year the minimum returns turned positive with the maximum returns and the difference between the two narrowed further. Finally, at 10e year, the difference between minimum and maximum returns is reduced and both are positive. Thus, if an investment has been held for 10 years, an investor has never suffered a loss and the minimum return achieved was 6.38% and the maximum was 22.08%. In reality, the investor’s actual return would fall somewhere in between.

Table 2: Volatility range

So, to increase wealth by investing in equity mutual funds, you need to think long term as volatility decreases and only minimal market risk remains.

3. Invest regularly and diligently

When investing in equity mutual funds, do so through Systematic Investment Plans (SIPs) as you further reduce the risk factor by investing a fixed amount at regular intervals regardless of market conditions. This is because when the markets are down you get more units and when the markets are up you buy fewer units.

For example, if you invest 10,000 INR per month in a SIP and assume that the Sensex drops 5% every month for the next 6 months, then increases 5% every month for the remaining six months, at the end of the period. Yearly, the amount you receive is INR 1,45,971 on an INR 1.20 lakh investment even though you saw a 30% rise and then a 30% drop in the markets.

If you watch, you started with a NAV of INR 10 and by the end it dropped back to around INR 10 after a year (see Table 3 below).

The Sensex is just a point of reference to show the movements of the market.

Table 3: Illustration of the advantage of the average cost in rupees:

Thus, SIP investing in a mutual fund in stocks, regardless of market movements, is an extremely useful tool in the hands of the investor.

4. Be patient and disciplined

The road to wealth creation requires patience and discipline, just as Rome was not built in a day. In the short term, the market is very volatile and the returns generated fall within a wider range. But over a longer period of time, market volatility decreases and returns fall within a narrow range.

For example, look at the performance graph below of a large cap fund versus the S&P BSE Sensex over 15 years. You can see that despite the sharp declines in 2008-2009 (Lehmann crisis), 2015-2016 (post-election) and March 2020 (COVID crisis) in Chart 3, the fund performed well and outperformed the S&P BSE Sensex.

If an investor had invested 10,000 INR in the HDFC Top 100 fund in January 2006, when the Sensex was up in December 2007, the value reached 19,451 INR. Later, when there was a market drop between 2008 and 2009, the value fell back to 10,602 (March 2009). However, if the investor continued to invest, the value was INR 55,202 in January 2018.

Now, if the investor had been patient, for a period of 12 years the value increased almost 5 times, but in March 2020 the value fell to 39,495 INR due to the fear of Covid. However, if the investor continued to hold, the value on the date would be INR 77,516.

It shows that when you invest in stocks, being patient helps you grow your wealth.

Graph 3: Long-term growth despite short-term volatility

(Source: Morningstar; Ventura Research)

Values ​​reduced to the base of 10 000 INR

When you invest in equity mutual funds, you don’t have to worry about the stock selection process. Instead, you should focus on your goal and continue to invest consistently, without panicking over market turmoil.

There are around 250 trading days per year, or 2,500 days for a decade. Much of a stock’s return over a decade occurs in 50 to 60 trading days. This means that what happens in 2% of the days decides your ten-year returns.

Even market guru Warren Buffet argues that “successful investing takes time, discipline and patience. No matter how talented or how hard, some things take time: You can’t produce a baby in a month by getting nine pregnant women.

Therefore, when investing in equity mutual funds, be patient, be persistent, diligent and let your funds grow, without synchronizing the market. Time in the market is essential.

Final result

We earn monthly and we spend monthly; so why shouldn’t we cultivate the habit of investing on a monthly basis? Think of an investment trip as a marathon, not a sprint. So think long term, and equity mutual funds are a great product for building long term wealth if you follow two investing mantras: the best time to invest is now and the best way to invest. investing is regularly, that is, every month.