This is the Million dollar question that every investor has in his mind before he goes for an investment in mutual funds. Almost all investors we met are confused on whether this is the right time to invest. There is a lot of debate and thinking behind the selection of when to invest but this could be an effort gone waste because the real effort needs to be directed towards ensuring that there is some investment that is actually made. There is no way that a person can know whether the current time period is a good one or not. The only thing which we can do is to analyse the fundamental attributes of the fund and its past performance in different market cycles to estimate its potential to grow in a future term.
Is it important to time the market?
If you look at the past 37 years of BSE Sensex,the market barometer has always beaten the highest point time to time giving average returns of more than 15% through out. So, is it the time of the market important or the investment horizon important, this is along time debate which is happening in the minds of the investors. The following illustration will give you some idea on this.
Mr. Ashok is a regular investor of mutual funds. He has a long term holding in Aditya Birla Sun Life Frontline Equity Fund which is invested after the sub-prime up on his friend’s advice. He did his first investment on 25-08-2009 when the Nifty was on a low and the next on 20-02-2012 with a lot of hesitation as the Nifty was on its peak at that time. The following illustration shows the difference of his returns of the fund as on 21-11-2017
Don’t worry too much about getting everything right. If you are following the basic rules, you will definitely get it right. It is quite usual for you to feel a bit nervous when you are investing in unfamiliar instruments for the first time.
Things which are important than timing the market
As with all investment strategies and financial plans, there are many ways to be successful. You just need to find one or two strategies that work for you and stay with them. Here are some important things that have to keep in mind before you start investing
It is better now than later
The most important decision that any investor should make in his mind is to start the process of investing rather than making it late by waiting for the right time. Only when this is done would there be a chance that the investment has gained something and the investor will benefit. Just waiting for the right time to invest will not yield any benefit and the best thing to do if one has not invested is to start right now. This will at least get the entire process off ground and ensure that one part of the investment action has been completed. Each day of investment will yield a return which will influence your long term growth.
Attach the investment to specific Goals
It is proven that if there is any specific need is attached to the investments, then the default percentage of those investments are comparatively less. When we do financial planning to the investors, we attach a goal to the investment such as children’s education, new house, the investor’s retirement etc. This helps the investors to visualise his goal achievement, which will influence his investment habit towards that goal. Attaching the investment with specific goals also makes you review the investment on a time to time basis.
Make investment a habit
Most of the investors who come to us fail to realise that the investment is not a one-time affair. To beat the market performance as well as the inflation, the investor should invest frequently and in regular intervals of time. That is why we recommend making theinvestment as a habit. This will also ensure that the money is being directed towards different asset classes as this can be easily completed using mutual funds. The only thing that the investor needs to figure out is how they should make this a habit. The SIPs are thebest option where one can invest a fixed sum each month on a specific date.Whenever there is an unexpected inflow of cash like abonus from your employer, time to time Salary increments, dividends etc., make sure that it goes to your investments.
Utilisation of different strategies of investment
We usually advice our investors to strategise their investments if she is reluctant to enter the market as she thinks that the market is standing at ahigh level. The most common strategy used in the market is the combination of a lump-sum investment with an STP (Systematic Transfer Plan). Usually, the lump-sum investment will be on a Debt or any other less risky fund from which an STP will be done to a high volatile equity fund to take the benefit of Rupee cost averaging. The same can be reversed to reduce the risk at the time of maturity.
Small things to keep in mind while selecting a fund.
While selecting a new fund for his investments, the investors can look for the following points which will help him to select the best possible fund as per there investment objective.
The investor should select a fund depending up on his risk taking capacity, the investor should analyse his ability to withstand any market downside and select the suitable category of the fund which will match with his risk profile. The investment objective of the customer also influences in the fund selection as the objective can be capital appreciation, regular income etc.
2) Performance of the fund.
The investor should analyse the performance of the fund pertaining to specific periods. He can compare the fund’s performance with the peer funds in the same category while selecting a fund for investment. The performance of the fund should not be the only parameter while selecting the funds. The return analysis should extend to the analysis of risk associated with generating this return. The ratios like Sharpe ratio and Sortino ratio will help you in determining this.
While we analyse the return of the fund, the risk of the fund should also be analysed to understand the risk taken for generating that specific returns. The risk of the fund should be matched with the risk profile and the risk takingcapacity of the investor. The parameters like standard deviation and downside probability will help you in determining this.
4) Duration of investment.
The duration of the investment is also a factor which influences in selecting a fund. If the investment duration is short, then less risky funds like debt funds and income funds should be selected. When the investment duration is long term, then an equity fund can be selected.
To conclude,once the legendry investor,Ben Graham told that”the investor’s worst enemy is often himself”.The process of wealth creation requires patience and discipline. In short term investment horizon, the performance of the portfolio can be extreme, but in long term, the performance normalizes. Irrespective of the time of entry, to reap the benefits in equity markets, an investor should stay invested for a long term. In the long run, equity investments have always out-performed inflation consistently. Investing in mutual funds would add the benefit of active fund management and tends to outperform the benchmark in the long run.
—Ranjith Content Strategist
Dilzer Consultants Pvt Ltd