A mutual fund is an indirect investment in the stock market or other instruments. Direct investment requires knowledge, hours of study and research, and amazing predictability of the market conditions, which is time and energy consumption. Even after all the above exercises, there are no guaranteed returns, it’s a mere basis as to why the returns will follow. The mutual fund takes away all these and provides investors with a plain and simple method of creating their wealth through diversified stock investment. Diversification is the ultimate benefit of a mutual fund, as a result of which, low-highs of a particular stock do not affect the overall investment. So how is timing important in a mutual fund?
The role of timing
Timing is a pre-requisite while investing in the stock market because it determines in future whether the investment is profitable or not. For example, one share of SBI in March 2016 would have cost you Rs 150. Today, if you wish to liquidate the same the figure is hovering around Rs 300, which is a 100% return in three years. This is one aspect of looking at timing, the other being buying at dips and selling at highs. The other aspect is simply the chance of a short-term opportunity, which tends to be highly risky. Investors often buy shares when the share prices drop and sell them when they reach their peak. But, how long will it take to reach its peak? Or where will the fall stop? These are some questions many investors fail to answer, which results in substantial loss and frustration.
Is timing important?
The answer is No. The primary reason being any investment in a mutual fund — especially an equity-based fund should be a long-term investment. Mutual funds start to provide a substantial return from five years onwards. Therefore, any concept of ‘buy dip, sell high’ is immaterial in a mutual fund. The secondary reason is that like equity stocks, the NAV of a mutual fund are also subject to volatility in its prices. However, as a result of the rupee cost averaging advantage, the volatility takes care of itself. Therefore, timing the mutual fund investment is futile, it is necessary to stay invested for a longer time to earn substantial benefits rather than timing it to perfection.
Hence, timing is immaterial while investing in mutual funds as there is no ideal or correct timing. However, every postponement of investment is an opportunity lost, therefore the best time to invest starts today. Every investment must have an objective and the objective then defines the target investment like debt or equity fund or liquid fund. For example, the creation of an emergency fund by investing in tax-saving equity schemes will jeopardise the entire objective. Instead of timing your investment, it is wise to invest time in the market to understand its structure, growth and its overall ability to rise or fall, which would make you take an informed decision. Actively managed fund or passively managed fund, exit ratio, XIRR, index fund etc., are terms which can be understood only after some time.
Points to note
Mutual fund investment is generally a long-term investment, barring the debt or money market-backed fund. Therefore, the buy-and-hold strategy is always profitable. Liquidation of the fund should always be because of the need or attainment of the objective, rather than market favourability. The ‘buy dip, sell high’ strategy may earn you a return. However, you may have to forego the substantial return of the rise of the economy over time. For instance, YES Bank was priced at Rs 700 in 2016. In 2017, the price changed. If liquidated then, it would have occurred you a loss of Rs 800 per share today. Thus, if your objective is to buy a house, time the of year in which you are targeting to purchase it, liquidate the investment then and not on hearsay news or wait for the market to rise.
From a mutual fund perspective, the timing is always right to invest. The punch line is, don’t wait, start from today and play longer innings.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
