When is the right time to invest in Mutual Funds? And the answer is right now, right away.

Before taking our discussion to the tips for investing in mutual funds, let us revisit the basic principles that drives the mutual fund. Mutual Funds are the collective investment schemes that pools money from the investors with the common objectives and are professionally managed. Though primarily, mutual funds are meant for retail investors, the corporate investors also have their major chunk in the Asset under Management (AUM). The major advantages that mutual funds carry are professional management of funds, economies of scale resulting in lower cost, improved liquidity, better regulation, diversification resulting in lower risk, plans for various needs & objectives.

The mutual fund industry has grown exponentially in last few years with total AUM being at nearly Rs. 27 trillion at end of 2019 from Rs 8.3 trillion in 2013, registering CAGR of around 19 per cent. And with Sebi’s new classification of MF schemes across categories, there has been relatively more clarity for investors to choose the funds that suits their need. This too has contributed to rise in Mutual Fund AUM.

We try to combine the tips for the right timing with factors that determines the selection right type of mutual fund.

(1) Goals and risk attitude with timing: The more important the goal is, more conservative the investment will become like index funds and large cap diversified fund and the Systematic Investment Plan (SIP) will do a better job here. The investor with capital appreciation objective would opt for growth funds with SIP. On other hand, one can opt for a lumpsum investment when markets are relatively low. The SIP in Hybrid and Debt Mutual Funds are best for investor looking for protection of funds. Likewise, person with need of regular income will go for combination of SIP in growth funds and can later transfer to Income Funds and Debt-oriented Hybrid funds to get the regular income.

(2) Constraints of investment and timing: The longer time horizon assists in taking care of market cycle and volatility and one can go for SIPs in midcap and largecap funds. With shorter time horizon, one would restrict to conservative equity mutual fund with mix of hybrid mutual funds and preferably go for lumpsum investment. The person with short term liquidity need would aim for investing in liquid funds.

(3) Tax saving funds and timing: One of the major objectives of investing in Mutual Funds have been tax-savings under Section 80 C with maximum of saving worth Rs. 1.5 lakh. This can be achieved through investment in ELSS Funds with either SIP and/or lumpsum. The SIP would do a better job to curb the market cycle. The three-year lock-in period also serve the same purpose indirectly. Also, some retirement plans of mutual funds are also eligible for deduction under section 80C.

(4) Timing lumpsum investment to benefit from down cycle: As seen, it is a good idea to start SIPs while investing in diversified equity funds across market cap classification. On other hand, the lumpsum investment can be availed to benefit from sector down cycle, for example with pharma, infrastructure being at a downside, a lumpsum amount can be invested into these funds to benefit from its lower valuation. This will help to get more units at a lower NAVs and benefits when the valuation is enhanced.

We can also discuss

(5) Timing the STP: The Systematic Transfer Plan (STP) can be integrated with lump-sum investment. Suppose one has large amount for investment and requires some analysis to select the sectors/funds or markets are at relatively higher level (timing the market), so what can one do? Here, one can put money in Liquid Fund initially and later can transfer it to selected Funds through STPs. Also, the STP can used to reallocate and realign the portfolio with life cycle of investor. Initially, the investor would start with larger portion of funds into equity which later can be transferred to balanced, debt and income funds through STP. This strategy will also depend on the age, need and market valuation at the time of transfer.

(6) Extra tip! - Is timing NFO investment a better approach? With many New Fund Offering (NFO) coming to market, it is obvious that one would opt for it. But the question is – Is investing NFO always a better strategy? The answer is “it depends” . Many advisors, authors have also advised several times that “Rs. 10 offering does not mean it is cheap.” An NFO similar to a pre-existing scheme, at higher valuation, does not make any sense, better would be to invest in the existing scheme with proven track record. Also, what one does not observe is the expense ratio of the fund scheme. The higher expense ratio can reduce the final investment amount. However, if the NFO is offered at lower market valuations and/or with a new theme and objective, one can opt for the same. In addition to it, the fund house reputation, fund manager’s track record, performance of similar schemes by other mutual funds, investment horizon with likely return and risk factors also should be considered while investing in the NFOs.

Please remember, these tips can only act major guidelines. And as always put by me, consulting a professional advisor is always recommended. So, keep investing!!!

The author is CFA, Head of the Department - Financial Markets, ITM B-School.