There’s always been a fair amount of debate among investors regarding stocks and mutual funds on risk-return trade-offs. This is probably here to stay, because of market volatility and the expectations investors tend to have. The pros and cons have been discussed several times over, and plenty of arguments have been thrown around to help make a choice.
Before investing, you should be aware of this unstable nature of the equity market, and try to spot the opportunity of entering with new investments.
Is the correction the best time to buy mutual funds?
Bearish markets are considered the best time to invest in stock markets. The worse the market performance is, the better returns you would get in the medium-long term. At the same time, investing via a SIP doesn’t need a continuous eye on the market, since the investment happens each month.
- Indian markets have been performing strongly over the past few years, and equity funds have gained extremely well as a result. Clearly, patience is the key and allocation is a skill. If you understand the markets, maintain a long term perspective.
- To answer our question then — should you invest in mutual funds when the market is down? Yes of course! But this should be in tandem with your SIPs running in parallel — not exclusively. Timing the market isn’t an exact science, and SIPs do well to protect you from wild swings.
Multiple strategies can be applied in mutual funds when the correction is expected in the market. If you have a surplus, you can invest in short term debt funds or liquidity funds. Make sure you choose the fund with a low expense ratio to gain maximum benefits. A multi-cap mutual fund provides many alternative options during bearish markets to switch and manage funds according to the investment goals.
Are SIPs the solution?
A SIP is a practice of investing a consistent rupee amount in the same mutual fund scheme at regular intervals (say each month) over a set period of time. What this leads to is good, old-fashioned common-sense: you end up buying more of a mutual fund scheme when the price is low, and buying less of the same mutual fund scheme when the price is high. At its core, a SIP is just a regular, automatic method of investing. The earlier a person starts investing, the more they’re able to reap the benefits of compounding.
A SIP is a better way to invest, because timing the market is something the many experts have tried to do, and largely failed. The retail investors, even more so. A SIP, therefore:
- Brings in some peace of mind, and reduces the stress associated with trying to time the market.
- Inculcates a saving pattern in investors to save every month from their income towards wealth creation.
- A SIP automatically protects you from wild market swings – so you end up buying more when prices are low, and less when prices are high.
How do mutual funds perform during corrections?
Asset allocation is an important factor in the performance of a portfolio. If a portfolio is moderately allocated between 60% equity and 40% bonds, it is not going to fall with the stock market. For example, if the market is down 7%, the portfolio should only fall up about 3%, depending upon the allocation.
When equities perform well, it also reflects in your portfolio. If you’ve invested a large part of your portfolio into equity, you may see your portfolio outperforming compared to certain stocks, due to their diversification.
This post has been reviewed by Kunal Bajaj.
Kunal has 18 years of experience in Institutional Equity Sales & Risk Management at some of the world’s largest financial institutions like Credit Suisse, J.P. Morgan, CLSA and Goldman Sachs Japan. His last role was Managing Director and Head of Equity Sales at Jefferies India. He is a rank-holding Chartered Accountant.