A lot of people wonder when the good time is to enter the equity markets. Equity markets are highly volatile and whether you make an investment in direct equities or invest via equity funds there is always some investment risk involved. The stock market fluctuates daily and because of this, it is impossible to predict a good or bad time to enter or exit the market.
Most investors panic and end up withdrawing their investments when the markets are low. This doesn’t only lead to losses, but more transaction costs as well. It is difficult to predict when the markets are going to hit rock bottom. The great Warrant Buffet quotes, “Investing is about the TIME in the market and not about TIMING the market”.
When is the right time to enter equity?
The answer to this question is simple, if you want to make a lumpsum investment then you must wait till the market hits an all-time low. If you are planning to invest in equity funds via SIP (Systematic Investment Plan) then you may not have to time the market as this investment approach averages out the purchase cost over time.
It makes sense to enter equity funds with lumpsum investment when the markets are low because this will allow mutual fund investors to purchase more units. When the equity markets are low, their performance is somewhat correlated to the NAV of equity funds. When the markets are all-time low, this will lead to a decline in the NAV of equity funds.
Investors must understand their appetite for risk before making lumpsum investment equity funds. That is because one may need to have a very high risk tolerance to invest the entire investment sum right from the beginning of the investment cycle. Exposing one’s entire investment sum to market volatility isn’t a desirable way to invest in equity markets.
Do you have enough time to remain invested?
Even if you make a lumpsum investment and enter equity funds when the markets are underperforming, you may need to have an investment horizon of 5 to 7 years or more for the scheme to show its true potential. Equity markets fluctuate as so does the stock price of companies. An equity mutual fund’s underlying securities consist of stocks of companies across market capitalization. A diversified investment portfolio may allow the mutual fund scheme to even out the investment risk and provide optimum results over the long term.
Don’t want to time the market? Start a SIP
It is believed that even seasoned investors find it difficult to time the market. If you want to enter equity funds without timing the market then the best way to do it is by starting a monthly SIP in an equity mutual fund scheme of your choice. A systematic Investment Plan (SIP) is a simple and convenient way of investing in mutual funds. Retail investors can start a monthly SIP and ensure that they save and invest a fixed sum. Investors can also use the SIP calculator, a free online tool that gives them a fair idea about the kind of returns they might earn at the end of their SIP journey.
When you start investing with SIP, the SIP sum adjusts every month’s unit allotment depending on the fluctuating NAV. This way, when the NAV is low investors receive more units and vice versa. This investment style is referred to as rupee cost averaging which over time enables returns to exceed the investment sum.
To ensure that you are making the right investment decision, it is better to seek professional consultation.