Mutual Funds: Should I Invest Regularly or Time the Market ?
Written on Saturday, October 22, 2016
By Team Bajaj Capital
"Let's say it clearly: No one knows where the market is going-experts or novices, soothsayers or astrologers. That's the simple truth." - ÂFortune
Unpredictability of the market often creates the clouds of doubts and dilemmas for the investors. 'Should I Invest Regularly or Time the Market' is one common dilemma of mutual funds investors.
The stock market will always remain volatile and thus, timing the market is just like chasing a chimera. If someone is thinking that he/she will rightly time the market then it is really questionable. When it comes to mutual funds, the golden rule is to 'Stagger Your Investments Over Time.' Also, you need to realize that it is not important when you 'Enter' or 'Exit' the market, important is how much time you are in the market.
If you have a lump-sum amount available for investment then you can stagger your investment through STP and if you don't have a lump-sum amount then start investing in small amounts through Systematic Investment Plan (SIP). Let's talk about SIP now, keeping STP for another day.
Why SIP is a Better Option to Invest in Mutual Fund?
Many advocate that SIP is a better or safer way to invest in mutual funds as it takes away the need of timing the market and also gives better returns. Same has been reinforced by a recent back testing study by Economic Times (ET). It shows that regular investing in mutual funds through SIP yields better results than timing the market.
Check the graphic
The Market Timer 1, who had closely tracked the market crashes, managed to withdraw his invested money before 10 biggest crashes, yet made less money than the Regular Investor, who continued his SIP irrespective of market ups-and downs. The Market Timer 2, as an experienced and knowledgeable investor, invested more during market crashes. But in this way also, he received marginal gains as compared to the regular investor.
How to Invest in Mutual Fund?
Market timers can avoid the market crashes but in long-term they are likely to yield less returns than regular investors. The Big Villain for market timers is the 1% exit load that they need to pay every time they sold off funds within one year of purchase. Sometimes, the loss is also because the market bounced back before the investor could re-enter.
In such a situation,what can be the better way of investing in mutual funds then SIP.
SIP makes you a systematic investor. It's easy, convenient and hassle free. Just like a recurring deposit, you need to invest a pre-determined monthly amount to your selected fund.
The motive is to keep investing irrespective of the market movement and not to withdraw the invested money as long as it possible. The prime piece of advice that you should take up in regards to SIP is to keep the investment period as long as you can, at least not less than 3 to 5 years because the market outperforms only over a period of longer term. When you invest for a longer period, because of 'Rupee Cost Averaging' and 'Power of Compounding, ' you can draw benefits even from a low market.
Important is to know which are the right funds to invest. For that, before investing in mutual funds one should always take the help of financial advisors .