Investing in mutual funds when the market is down
Fear and insecurity have gripped Dalal Street again. But while the market professionals are still betting big, mutual fund investors, especially the ones who’ve never experienced a crash, are petrified.
Nifty started 2018 around 10,400 on January 1st. Fast-forward to August 2018, and it surpassed 11,700 to reach a new all-time high. But just 2-months later, Nifty is back to where it began the new year. On October 22, it closed at 10,245.
In other words, all the gains Nifty made in 2018 are erased.
While market pros are still sitting tight on their portfolios, a majority of the new mutual fund investors are petrified after the crash. But ask any market expert and they’d agree that this is not the time to exit your mutual fund investments. In fact, investors who are optimistic about the market would advise you to invest more.
Let us have a look at some reasons why you should remain invested in mutual funds.
1. Understand the reasons behind the fall
As an investor, it is essential to understand why is the market going down. For instance, the current market crash in India is due to several reasons including weak macroeconomic numbers, global cues, falling rupee, rising crude prices, IL&FS crisis and fear of other such defaulters.
But it is worth noting that the Indian economy is continuing to grow. All these reasons that have resulted in the storm would subside sooner or later and the bulls might be back with greater strength.
2. Such crashes are common
A major reason for the fear and insecurity is the fact that many mutual fund investors started investing in the past 1-2 years. During the period, the market didn’t really see a major crash.
But check the historical charts of the market, and you’ll see that such crashes are not uncommon. Change is the only constant and the rise is followed by a fall and vice-versa in the lifecycle of markets.
3. Equity funds are long-term investments
Exiting an equity fund investment just after a few choppy months may not be a wise decision. Equity funds are known to be long-term investments which can take anywhere from 5 years or more to deliver handsome returns.
Even if you’re thinking about switching to a different equity fund, wait for some time as 1-year is not a duration that you should consider analysing a fund’s performance. As long as you were thorough in your research when you invested your money, there is no need to exit mutual funds or switch to a different fund.
4. Buy mutual fund units at a discount
If you started investing in an equity mutual fund at the beginning of this year, the Net Asset Value (NAV) of your fund might have reached the same level where you began or maybe even lower by now. If you understand the concept of rupee-cost averaging, it shouldn't be difficult for you to understand that this is the time to buy mutual fund units at a lower NAV.
While the idea might seem bizarre to some as per the market trends, lakhs of other investors are already doing it. As per AMFI, the domestic equity fund investments rose to a staggering Rs. 11,172 crores in September 2018 which is 33.39% higher than the investments made in August 2018. Note that the markets hit an all-time high in August 2018 and started falling throughout the September month.
5. Should you invest lumpsum or through SIP?
A common question among a lot of investors during the choppy market is should they invest through SIP or go with a lump sum investment in mutual funds.
We believe both lump sum and SIP are ideal for mutual fund investments during such crashes as the NAV has fallen and you get to buy mutual fund units at a lower price. If you are planning a new lump sum or Systematic Investment Plan (SIP) investment, make sure that you select the scheme carefully and if you have already invested through SIP, make sure that you continue investing.
Wrapping it up
A large number of new investors often look for answers to when to buy mutual funds. Timing the market is not the right strategy for long-term investments. Rather than worrying about the rise or fall on the market, take a disciplined approach to investing in mutual funds and focus on your overall portfolio performance and financial objective.