When is it a good time to invest? But that’s a loaded question at any time, and not just in the current market mood. The answer to whether the time is right depends on three factors – the purpose for which you’re investing, the number of months or years you will be investing for, and the mode in which you’re investing. Answering this needs answering a couple other questions first.
What is your goal?
If it to save taxes through tax-saving funds, then there is no correct time to invest. One, you need to do it every year. Two, you need to hold this for three years or more and equities usually deliver well over the long term. If it is for your retirement several years down the line or you simply want your money to grow over time, even then the timing does not matter. This is because, over the long term, equity delivers inflation-beating returns and you would always get superior returns. However, if you are saving up to buy a car or to meet the down payment for a home, then your horizon is likely to be shorter. It makes timing more important then.
What is your investment horizon?
Once your goal is decided, then your horizon is decided. In other words, how long do you plan to hold your investments? If your holding period is less than five years, then it is not a good time to begin investing in equity funds. Considering the Nifty 50 returns over the past ten years rolled daily, there was a 20 per cent chance that you would wind up with losses if you had pulled out your money in one or two years. Such a holding period is good timing for debt funds. If you have a horizon of 2-3 years, then a short-term debt fund is good. If it is even shorter at 1 year, go for ultra short-term funds.
If your horizon is five or more years, then it is always a good time to invest in equity mutual funds whether the market at the moment is in a bullish mood or bearish. Rolling the Nifty 50’s five-year returns daily over the past ten years throws up only a 2 per cent chance of actually incurring losses at the end. The odds are even better on investing in quality equity funds. Likewise, there is no perfect timing for long-term income funds and dynamic bond funds if you have a time horizon of 3 years and more.
However, timing is essential if you’re considering sector-specific funds those on themes, such as manufacturing, services, or consumption. Themes and sectors are not perennial and can completely go bust. You need to catch the theme around the time it is gathering momentum, and get out when the tide turns. For example, 2009 to 2014 was good for pharmaceuticals, but no longer. 2015 was a bad year for bank stocks, while 2016 was a good one. The timing problem doesn’t arise in non-themed equity funds as the fund manger actively switches between sectors. Similarly, pure gilt funds need a timed entry when yields are high and an exit when they bottom out. Other debt funds don’t have such timing issues. Even dynamic bond funds would book profits on gilts as the cycle bottoms and move into accrual, so the timing problem is solved.
How do you solve the timing problem?
Even if you have a long-term horizon, you may be worried about investing at market peaks in equity funds – and rightly so. The answer to this concern is systematic plans. If you do not have a lump sum to invest, then simply start a SIP in your equity funds for whatever your monthly amount is. Should the market correct, continuing your SIPs through this will allow you to buy at lows. SIPs anyway need to be run for three years at least. If you do have a large sum to invest, decide the equity funds. for each of those equity funds, pick the liquid fund from the same fund house. Then set a systematic transfer plan from those liquid funds into the equity funds for 8-10 months. This will ensure that you do not put all your money in at peaks and allow you to capture any corrections if they occur.
Further, adding debt funds to your portfolio along with equity will temper your portfolio’s risk level. So even if stocks do correct, the debt funds will help contain your portfolio’s losses. The extent to which you include debt depends on your timeframe and risk levels.
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