Markets are up-The Sensex is almost at 33,000 in December 2017. Many experts are predicting, it can still go up. Most of the investors have the question in their mind. Is it right time to invest in mutual funds now in 2018? Should I stop/postpone my SIPs in mutual funds or should I start a new SIP in mutual funds?
Is it right time to invest in mutual funds now?
Sensex at 33,000 is attracting us to invest in the market. Rather than looking at these values, let us see why the market can give a good return in the long run. India is going through a phase which can help the Indian equity market to offer decent returns in the next decade or so. Let us analyse the reasons:
- Falling oil prices: Falling oil prices will reduce the oil import bill of the country and help in improving the current account deficit which will have a cascading effect in the reduction in price of many essential commodities. This will also help in reducing inflation. While industries like automobiles and paints will be the direct beneficiaries, most of the other sectors will also be benefited indirectly. This can boost the economy.
- Reduction in interest rates by RBI: The Reserve Bank of India reduced the Repo rate to 6% . The reduction in rate is due to the reduction in Consumer Price Inflation which is on the decline. With this, we can expect a lower interest rate regime for a fairly long time. A reduced interest rate is good news for most of the companies. While sectors like Banks, Home Loan companies and NBFCs benefit directly, many other sectors will benefit indirectly.
- Stable government at the Centre: We are having a stable government at the Centre after many years of coalition politics. BJP is known for its industrial-friendly economic policies. With a visionary leader like Narendra Modi, we can expect the economy to grow in the coming years. The Make in India campaign, Smart City concept etc can boost the manufacturing and infrastructure sectors.
- Slowdown in China and many other emerging markets: There are reports of a slowdown in China. With a young population, India is well poised to take on China as the fastest growing economy. As per the recent World Bank report, India can overtake China in the next 2-3 years. This will make India a preferred choice for FDI and FII in the coming years and will support the Equity market.
- Huge young population: India will soon have the largest youngest workforce ever. Nearly half the population is less than 25 years of age and around 1.2 crore young people will be entering the job market every month for the next 20 years. A good number of these people will be working abroad and will help in improving the inward remittance. This can boost the consumption and most of the sectors will be the beneficiaries of this.
- Introduction of GST: The introduction of Goods and Services Tax (GST) can boost the tax collection by plugging the leakages in the tax administration. This will help in higher tax revenue and lower fiscal deficit. All these can help in improving the GDP of the country.
All these factors and many others can really help India to grow as the fastest growing economy and into a developed country status earlier than expected. This will offer investors in Indian companies a chance to make more money than the past decade.
When to invest in Mutual Funds in India?
So there is no better time to invest in mutual funds in India, its now only.
Is it right time to invest in mutual funds in India? Yes, it right time.
If you ask me, what is the best time to buy mutual funds in the year? My answer would again be now only.
Now if you have decided to invest in mutual funds, let us see why SIP can be better route to invest in mutual funds?
How Mutual Funds SIPs work- When Markets are down or up
In Systematic Investment Plan, you invest the same amount every month irrespective of the level of the market. Let us assume that, you are investing Rs. 5,000 on the 1st of every month in HDFC Equity Fund by way of SIPs. Let us assume that the NAV of the Fund was as follows from January 2018 to December 2018:
January 2018– 510
February 2018 – 520
March 2018– 530
April 2018– 480
May 2018– 450
June 2018– 440
July 2018– 460
August 2018– 450
September 2018– 400
In this case, you are investing Rs. 5,000 every month, irrespective of the NAV movements. In January, you will get 9.803 units (5000/510=9.803); and in February you will get 9.615 units and so on… In the month of May, you will get 11.111 units. How?
When the markets are down, the NAV of the Fund is also down and you will get more units like in May. But, when the markets are up, the NAV of the Fund is also high and you will get fewer units like in February. So, your purchase price will average out and this will bring down the cost of units in the long term. When the markets are up, you will get the benefit by way of capital appreciation. This is the essence of SIP investing.
Story of Mutual Funds SIPs during the 2007-2010 volatile market
I will explain it to you with an example. During a volatile period in the recent past, the Sensex was around 20,000 levels in December 2007 and it was an all-time high at that time. The markets started correcting in 2008 due to the global crisis and it had corrected by around 50% in one of the steepest fall in Indian history. But it started recovering slowly and it reached the same 20,000 levels in December 2010. So, in absolute terms, there was no growth in Sensex value for the 3-year period from December 2007 to December 2010. Had you invested Rs. 10,000 in Sensex in December 2007, it would have reduced to Rs. 5,000 and would have returned to the original Rs. 10,000 levels by December 2010.
Let us see how SIPs have performed during the same 3-year period. Assume that, you were investing by way of a Rs. 1,000 SIP in HDFC Equity Fund for the 3-year period i.e. December 2007 to November 2010. The NAV of this Fund as on 1st December, 2007 was 207.9210. The NAV was moving in line with the volatile markets during this period. By March 2009, the NAV was reduced to 96.2250.
Many investors stopped their SIPs seeing the reduction in NAVs. But the brave hearts continued the SIP. The NAV started appreciating with the market recovery and it reached 306.9680 in November 2010. The value of Rs. 36,000 invested during these 36 months was Rs. 64,002 as on 1st November, 2010. The return percentage is alarming and tempting! The NAV of this Fund is 463.672 as on 28th April, 2015 and this investment of Rs. 36,000 is worth Rs. 96,675 now. This is the benefit of SIP.
Is it right time to invest in mutual funds in volatile markets?
Volatile markets are good for SIPs – Don’t stop SIPs
So, when the markets are down, be happy and continue your SIP. Don’t stop SIPs in the volatile markets. Volatility can help you in the long term.
But, if you are 2-3 years away from your financial goals, then stop the SIPs in Equity Funds and start it in a Debt Fund to protect your money from any last minute volatility. You can use a Systematic Transfer Option to transfer your Equity Savings to Debt when you are nearing the financial goals.
It is better to have the entire amount in Debt Funds 1-2 years before the goal. This can help you in protecting your savings.
What is your view on SIPs- Should you stop it or continue the same when markets are down?
This question is asked by many – especially those who were left out without investing in the market and sitting on the fence expecting some corrections. The bull run of around 35-40% in the last year is attracting many to the Indian Stock market. But before entering the market, please ask yourself, whether it is the right time to invest in the Equity market.
If your financial goal is just for 2-3 years and you want to save to fund those goals, then Equity might not be the right choice for you. For such short term goals, go through the Recurring Deposit and Short Term Debt Mutual Funds. Starting a Recurring Deposit for 3 years will be a good idea now, because you will continue to receive the contracted rate of interest for the full term, even if there is a reduction in the interest rate by RBI in the course of the year.
If your goals are at least 5 years away, you can plan for those goals through Equity. Investing in Equity can be best done by investing through Mutual Fund SIPs.
Start investing in Equities through good Mutual Funds to enjoy the high return. Invest in the Direct Plan of Mutual Funds, if you want to get an additional return. If you cannot identify good funds, go through a Fee only Financial Planner who will suggest you good Funds at a nominal fee.
What do you think, is it right time to invest in mutual funds and through which route?