Here's when to buy a mutual fund

Anil RegoRight Horizons

A mutual fund is an investment avenue for small and large investors alike, wherein the investors’ money is pooled in and professionally managed and invested by fund managers. This benefits investors as they can get the advantages of scale as well as returns from a professionally managed portfolio at a fraction of the cost of what it would otherwise.

Through this diversification, one’s portfolio risk is reduced. In brief, mutual funds provide a steady flow of income or capital appreciation in the short or long term (depending on one’s investment horizon and goals) through a diversified portfolio at a low cost and lower risk.

There are several factors to consider while buying a mutual fund, but one of the most important is When! If there is a bull market it is normally considered a good time to invest in the equity markets, however, caution should be taken to ensure that one does not invest at the peak and lose one’s capital.

Unlike popular wisdom, it is actually a good time to invest in the stock markets (via mutual funds) when the markets are down. The worse the markets are, the better returns you are likely to get in the medium to long term.

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One should ideally invest via the SIP (systematic investment plan) route, as this ensures that one does not need to time the market. Since the investment takes place each month irrespective of the market condition, one benefits from both an up market as well as a down market.

In times of bull runs, one’s portfolio returns will be higher, and in bear markets one will get more units for the same investment - which will later lead to better returns. In a SIPs model investors tend to purchase more units when markets falls and fewer units when the market rises. Hence the average cost per unit declines over a period of time, thus being an effective tool of risk management.

This benefit can be availed only when the investor tries to stick on for a long term basis as market is highly volatile and it is difficult to time the market. Hence, it is advisable to always invest in mutual funds via the SIP route and automate this investment to ensure that it is made correctly each month.

There are other factors as well to keep in mind while buying mutual funds. Before investing in a mutual fund, investors should read the policy document and conditions of the fund carefully, and should conduct research on mutual fund manager‘s performance track record, the fund house’s reputation, the past performance of the fund, corpus size of the fund, etc.

The mutual fund manager’s investment skills can be best determined by measuring their performance through a full market cycle of 3 to 5 years.

An investor has to understand one’s own appetite towards risk and market fluctuations. A risk-taking investor will be able to invest in a mid-cap or a small-cap fund but at the same time a conservative investor will be more interested in a bond or safer large-cap fund.

One should also compare the performance of the mutual fund its peers and competitors, especially in the areas on returns, costs levied on the investors’ (fees), etc. One has to research the specific fund with a full understanding of the fees. The expenses of the mutual fund should be within the industry norm (the lower, the better).

If one is willing to invest for the long term, then equity mutual funds are the right investment decision. As holding the investments for a longer term period will benefit the investors, due to the power of compounding, as well as zero long term capital gains tax for equity instruments.   

Summary:

Invest via the SIP route to get maximum benefit out of the mutual fund

It is advisable to invest more when the markets are not doing well than when they are doing very well

Compare the mutual fund performance and fee structure with its competition before investing

Do research on the fund manager track record before investing in the mutual fund

The author is the CEO and founder of Right Horizons