The most common questions- When do I start investing in mutual funds? Is this the right time? Should I wait for the markets to correct? As Warren Buffet rightly quoted- “You only have to do very few things right in your life, so long as you don’t do too many things wrong.”
All the above questions are of million-dollar, but the answer is very simple. The early you start investing the better it is for you. This is one of the few things that you can do right in your life without much further confusion.
Just asking the questions about the right time to start your mutual fund investment will not yield you anything. As an old saying aptly summarizes, “The best time to plant a tree was 20 years ago. The next best time is now.” Similarly, the best time to start investing in mutual funds is now. This will give a kick start to your investment process and ensure an investment action at an early stage of your life. You can start with the mutual fund option once you know that you can put your savings to an investment option.
Power of Compounding
Starting the mutual fund investment at an early age reduces the monthly investment amount required for the fund. For example, if you start investing from the age of 25, you will earn a final yield amount at the age of 60 by investing a specific amount every month. But the same monthly investment amount will increase if you start investing at the age of 30. So, if you were required to invest 1500 rupees every month when you started at the age of 25, you may require investing 2500 rupees when you initiate your mutual fund investment at the age of 30. This amount will further increase when you start the investment at the later stage of your life.
When you start your investments at an early stage, you benefit from the power of compounding. Compounding simply means that your invested amount along with the returns generated by it is again invested to generate more returns over time.
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Rupee Cost Averaging
SIP’s are gaining popularity in India due to its simple rupee cost averaging concept. Also, the investment process in SIP is simple as it requires a fixed investment to be made every month on a specific date. However, the cost of units fluctuates daily and cannot be foreseen. This means that fewer units will be purchased when the unit price is high, while a greater number of units will be purchased when prices are lower.
However, the actual per unit cost will be an average of all the SIP transactions that you did over the period of time. This offset the volatility of the market.
For example, if you buy 20 units at Rs. 100 each and again 40 units at Rs. 50 each. Each time you spend 2000 rupees. For both, the transaction the total amount spent is 4000 rupees (2000 + 2000), and the total number of units bought are 60 (20 + 40).
The average unit price will come to Rs. 66.67 (4000/60). Thus, if the cost of an individual unit exceeds Rs. 66.67, you stand to make a profit. The reason for this is that you had bought 20 units for Rs. 100 each and the rupee cost averaging factor comes into the picture.
Consider your financial goals before investing
Before going for a mutual fund investment review your financial goals. This will provide you with some clarity for opting a specific mutual fund. Understand the importance of allocating money to different asset classes, based on your risk capacity and time horizon.
Separate your goals by segregating them into needs and wants by priority. Once your decision is made align your needs and wants towards the investment process.
When you invest in mutual funds at an early stage, it becomes easy to evaluate the future value of your goals. For example, education at the current stage may cost 5-10 lakhs, but the same education for your child may cost more than 20 lakhs in the future. Hence aligning your goals and the investments become important here.
A mutual fund for every goal
There is always a right mutual fund for you at every right time. If you have long term goals and can take higher risk, you can opt for equity mutual funds for better wealth creation. At the same time, there are numerous amounts of liquid funds and hybrid funds for those of you looking for short to medium term goals.
Investment should not be a one-time activity
You need to undertake the investment process in mutual funds on a constant basis. It is not a one-time activity. Regular investments done at regular time intervals ensures a healthy investment habit along with consistent returns. Mutual funds will allow you to invest money in different asset classes, and the earlier you understand this, the better it is for your investment portfolio. Systematic investment plans give an opportunity to the investors to make an investment a regular habit.
If you are unable to dedicate yourself towards investment regularly and there has been a huge gap in this process, make sure that there is a plan made up for the lost time. You have numerous options now ranging from lump sum investments or SIP’s. You can also invest a substantial sum in debt funds and then transfer it to an equity fund using the Systematic Transfer Plan (STP).
Effect of market movements on systematic investment plan
An investor can buy more mutual fund units when the market is down. But the number of units that you can buy becomes lesser when the markets are moving in the upward direction. So, in the bear market scenario, you have more units at your disposal. Even if the markets fall further, you end up accumulating more units for yourself. This accumulated units, in turn, generate good returns for you when the markets start recovering and moving upwards. This works in your favour only if you invest for a longer term.
It is always a good time to invest in the mutual funds, and your investment decision should be based on your goals, investment horizon and risk profile. The process of wealth creation in mutual funds requires patience and discipline. Irrespective of the time of entry, an Investor should stay invested for at least 5 to 7 years to reap better benefits. Know the best mutual fund for you by visiting FinEdge Advisory and start with your investment process now.