When Is The Best Time To Invest In Mutual Funds? (2024)

We set resolutions and goals to enhance physical, mental, and financial well-being. The first two are health-related, and we try to keep up with them while ignoring our financial well-being as the year passes. When we say financial well-being, we mean investment decisions.

We don’t invest thoughtfully in equity because we try to follow the mantra “buy low, sell high” and fail to do so. When markets hit rock bottom, 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 do not think long-term and put off their investments.

The common reasons investors give when they wish to avoid or postpone their investment are.

• “It’s too late!”
• “It’s not a good time.”
• “Why should I invest now?”
• “When should I invest in Mutual funds?”
• Or “What is the best time to invest in mutual funds?”

If you, too, give these reasons when it comes to investing, you are making a big mistake. Remember, you should not delay investing; start your investment journey right away! If you haven’t already started, the best time to start your investment journey is ‘Today’!

Tips to begin an investment journey

Here are a few tips to help you begin your investment journey.

1. Do Not Delay, It Can Cost You

When we stall or avoid investing, we simply delay or completely evade successful wealth creation. Delays in investing reduce the power of compounding as the investment term decreases.

To understand better, let us see the amount three friends—Ajay, Vijay, and Ram—would get at the end of their investment tenure. Ajay starts investing INR 2,000 per month at age 25 for his retirement age of 60. Vijay and Ram began investing 5 and 15 years later than Ajay. Then, the future values of each will be different.

Table 1 shows that future value reduces with the reduction in the investment term (subtract the person’s age from the retirement age).

Table 1: Effect of delayed investment

Even though they have all earned the same rate of returns per annum on their investments, Ajay, who started investing early, will have the most extensive corpus by far at retirement. Therefore, starting the investment journey early is a boon if you want to build a considerable corpus for your financial goals.

Let us assume that even though Vijay delayed his investment by five years, he invested an additional sum of INR 1.20 lakh per annum to catch up with Ajay, and Ram invested INR 3.60 lakh per annum to catch up with both. Even then, the corpus will be INR 1.11 cr for Vijay and INR 99.05 lakh for Ram, less than Ajay’s future value. The difference is nothing but the cost of delay.

2. Choose the Right Asset to Deal with Volatility and Risk

Choosing the right asset is crucial as it will help you grow wealth. Equity, as an asset class, can help you grow your wealth manifold, but along with higher returns comes its volatile nature, which investors tend to confuse with risk.

Volatility reduces over time, but risk may not. Risk is about choosing the right product. For example, selecting a company with bad management could be risky; irrespective of how the market moves, the share price may never appreciate.

The stock of Kingfisher Airlines is a perfect example (graph 1). In 2006, it was at INR 76, and later in 2007, it reached its peak of nearly INR 300+, only to fall drastically and never recover. Ultimately, an investor would have lost all his money because the stock was delisted. This is a classic example of a risky proposition that resulted in a permanent loss but was not volatile.

Graph 1: Price movement of Kingfisher Airlines

If, instead, you choose a company with good management, the price may stagnate and may not move for an extended period, but eventually, it will deliver results. Choosing management is a risk, and the price movement is about volatility. Volatility is a market-related phenomenon, and risk is more intrinsic.

For example, the price of Reliance Industries remained within the range of INR 400 to INR 500 from 2010 until January 2017. Later, the stock rallied and kept its momentum (as seen in graph 2). The stock price moved from INR 544 in February 2017 to INR 2,370.25 in December 2021.

Graph 2: Price movement of Reliance Industries

When you choose equity mutual funds, you invest in a basket of multiple stocks from various companies. This diversification prevents you from considerable losses when the market gets tepid. So, while you still have to deal with volatility, the risk factor is reduced. This is one of the primary reasons that mutual funds are an ‘all season’ investment plan.

Equity markets are volatile by nature. This is a given. In the short term, volatility will be greater, and as the time horizon increases, volatility will reduce.

The best way to understand volatility is to look at rolling returns. Table 2 below shows the maximum and minimum rolling returns over 20-year periods.

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

Further, in the fifth year, the minimum and maximum returns turned positive, and the difference between the two decreased further. Lastly, in the tenth year, the difference between the minimum and maximum returns narrowed, and both were positive. So, if an investment was held for ten years, an investor never made a loss. The minimum return made was 6.38%, and the maximum was 22.08%. In reality, the investor’s actual return would be somewhere in between.

Table 2: Volatility Range

To grow wealth by investing in equity mutual funds, you should think long-term, as volatility tapers and only minimal market risk remains.

3. Invest Regularly and Diligently

When investing in equity mutual funds, do it via systematic investment plans (SIPs). By investing a fixed amount at regular intervals, irrespective of prevalent market conditions, you reduce the risk factor further. When markets are down, you get more units, and when markets are up, you buy fewer units.

For example, if you invest INR 10,000 monthly in a SIP and assume that the Sensex drops by 5% every month for the next six months and then rises 5% every month for the remaining six months, at the end of the year, you receive INR 1,45,971 on an investment of INR 1.20 lakh even though the markets rose 30% and then dropped 30%.

If you observe, you started with an NAV of INR 10 and, at the end, it was back to around INR 10 after a year (refer to Table 3 below). The Sensex is just a reference point to show market movements in a real scenario.

Table 3: Rupee Cost Averaging Benefit Illustration

So, SIP investing in an equity mutual fund, irrespective of market movements, is a beneficial tool for investors.

4. Be Patient and Disciplined

The road to wealth generation 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 are broader. However, market volatility subsides over a more extended period, and the returns are within a narrow range.

For example, look at the performance chart below of a significant cap fund vis the S&P BSE Sensex over 15 years. You can see that despite the sharp falls in the years 2008-2009 (Lehmann crisis), 2015-2016 (post-election), and Mar. 2020 (Covid crisis) in Graph 3, the fund has done well and outperformed the S&P BSE Sensex.

If an investor had invested INR 10,000 in HDFC Top 100 Fund in Jan. 2006, when the Sensex was up in Dec. 2007, the value would have reached INR 19,451. Later, when the market fell during 2008 and 2009, the value crashed back to 10,602 (Mar. 2009). However, if the investor had continued to stay invested, the value would have been INR 55,202 in Jan. 2018.

If the investor had been patient for 12 years, the value would have increased nearly fivefold. However, in Mar. 2020, the value dropped to INR 39,495 due to the COVID-19 scare. However, if the investor continued to hold on, the value as of Aug. 2021 would be INR 77,516.

This shows that when you invest in equity, having patience helps to grow wealth.

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

To invest in equity mutual funds, you don’t have to worry about the stock selection process. Instead, you should focus on setting investment goals and continue investing systematically without giving in to the panic caused by market turbulence.

There are roughly 250 trading days a year, making it 2500 days for a decade. A large portion of a stock’s return in a decade happens in 50 to 60 trading days. This means that what happens in 2% of the days decides your decadal returns.

Therefore, when you invest in equity mutual funds, be patient, show perseverance and diligence—and let your funds grow without timing the market. Time in the market is of the essence.

Bottom Line

Every month, we earn and spend. So, why shouldn’t we cultivate the habit of investing every month? Treat an investment journey as a marathon, not a sprint. Long-term and equity mutual funds are ideal products to create wealth if you follow two mantras for investment: the best time to invest is now, and the best way to invest is regularly—in other words, every month.