Mutual Fund Investment: Should you invest in MFs when the stock market is down?

Updated: November 6, 2018 1:41:11 PM

In a situation where the stock market is down, you can actually give yourself a ‘smart investor’ tag by buying more units of mutual funds to benefit out of the crash.

mutual fund investment, mutual funds, MFs, stock market, SIP, stock market crash, stock market downMutual Fund Investment: It is always a good idea to invest in mutual funds for a long term as short-term investments are too risky.

The world today is unpredictable and we see a lot of uncertainty, complexity and volatility when it comes to investing in mutual funds. Though people now understand about what type of mutual fund they should invest in, they are still largely unaware about when is the right time to invest in the bull market via mutual funds.

Considering the beating that the Indian stock market is taking, mutual fund investors face the wrath every time the market tumbles, often leading to discontinuation of their SIP investments without having any knowledge that how can market crash actually help them get better returns.

Should you sell mutual funds when the market is down?

It is true that the market fall does give you jitters, but selling your funds is not the only way out. In fact, you should quickly get up and get back in the game. Always remember, mutual fund investments are best made for long terms and few ups and downs are very much a part of the journey. So, during such times, it is best to stay calm and think of ways out to deal with the situation.

So, what should an investor do?

Don’t time the market

It is practically impossible to predict the behaviour of the stock market on a certain day. When there is a market crash, the Net Asset Values (NAV) of the fund falls, creating a panic-like situation among the investors. This, in turn, leads to investors stopping their funds or redeeming it. Volatility is inherent to equities. There is not really a strategy in place which one can follow as to when to make a mutual fund investment. As it is highly impossible to time the market, it is always a good idea for an investor to invest in mutual funds when the market is low. In fact, the worst the market gets, the better it is for the investor.

Benefit from the lower NAV

Remember, mutual funds follow the rupee cost averaging, meaning that the number of units purchased depend on the existing Net Asset Value. Also, NAV decreases during the market crash. So during such a situation, an investor can purchase a high number of units, if eyeing for a long-term investment. However, one must ensure that the portfolio has good growth prospects and would fetch better returns in the future.

Take the SIP route

We all are aware that there are two ways by which an investor can invest in mutual funds – one being lump sum investment and the other being the systematic investment plan (SIP).

Ideally, it is always a good idea for an investor to take the SIP route when the market is low. This is because an SIP mutual fund allows you to invest a small amount regularly over a long period. So when you are investing your money for a longer term in small amounts, the market fall would look like a small blip when you look back. An SIP model allows investors to purchase more units when the market falls and fewer units when the market rises. Thus, this averages out the purchase cost of your mutual fund. Also, on taking the SIP route, an investor does not need to time the market as irrespective of the market condition, he will benefit both from the ups and downs of the market.

If investing through SIP, an investor does not really have to worry about the NAV as its volatility will average in the long term, giving him good returns.

Invest through variable SIP

A traditional SIP does not allow an investor to invest more when the market is low. But a variable SIP plan does. When markets are trading low, a variable SIP plan allows an investor to alter his SIP instalments to get better returns in the future. For instance, you can make use of InvestOnline.in’s variable SIP calculator by a pre-setting periodical increase in SIP amount in % terms to inculcate discipline in higher sip exposure.

Don’t stop the SIPs

When the markets are down, investors usually end up making the wrong choice and end up stopping the SIPs. It is important for investors to understand that investing a small amount regularly over a long period is the best way to maximize wealth.

Don’t invest in any fund

Any wrong investment made when the market is down can lead to hefty losses in the future. So, even if you are getting a fund with more units at a lower NAV, it is necessary that you analyze the fund performance and then make an investment. Don’t invest in any random fund as it can cause a heavy damage to your investment portfolio.

Invest for long term

In simple terms, it is always a good idea to invest in mutual funds for a long term as short-term investments are too risky. Ideally, to get better returns out of the mutual fund investments, an investor should at least invest for a good 3-4 years.

Thus, in a situation where most of the investors are panicking, you can act smart by opting for long-term portfolios by the way of SIPs or variable SIPs to benefit from the downfall.

(By Abhinav Angirish, Founder, Investonline.in)

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