For mutual fund investors the past few weeks may have been a dreadful experience, seeing their net asset value (NAV) taking a nosedive.
And, as we brace for the economy tumbling into recession while hurting the corporate earnings, investors will turn apprehensive with regards to investing in equities.
Many investors may be considering to exit the scheme they have invested long time. But, hey! Wait a minute and before you take decision read this.
Exiting now will do nothing to recoup the lost value of your investment and will only mean that you will be selling your mutual fund units at a loss.
Those who believe the market will recover (as it always has historically) and do well long-term, then staying invested will ensure that your investment value recovers and you end up with a satisfactory return.
The Coronavirus pandemic has washed millions of dollars from the global markets. Equity markets are down close to 25% from their recent highs.
As we know, the Mutual Funds are the collective investment schemes that pool money from the investors with the common objectives and are professionally managed. Various mutual fund schemes are devised to suit investor risk appetite, particularly of retail investors. The corporate investors have also 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.
Mutual funds have gained immense popularity among investors due to its flexibility. There has been growing acceptance to invest in mutual funds due to the availability of several fund categories that suit investors across all risk profiles.
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%. 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.
Investment decision is mostly based on the need (in terms of return) and timing. While the former considers investible surplus, the later determines your ability to implement the decision.
Instead of waiting for an ideal time to invest, it is better to start today and ensure that you follow the basics to earn good returns. However, there is a second step in this process – finding out the suitable funds, and this depends on several factors, which include your personal goals as well.
An important part in AUM growth is played the scheme objective or goal.
Risk-averse investors should consider investing once the market gets corrected, as, after the fall, the markets try to recover the losses incurred.
Investors who are willing to face high risk can invest at any time, as they will experience all market cycles and correction while enjoying high returns.
The more conservative investment strategy/profile, accordingly a scheme selection can be done. For instance, a steady ans conservative return purpose, mutual fund scheme such as index funds, large cap diversified fund and the Systematic Investment Plan (SIP) will do a better job. 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.
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.
Another major objectives of investing in Mutual Funds has 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.
Any investor, while assessing their risk profile and financial goals, should keep in mind the investment horizon before investing in a particular fund. The investment horizons could be either long-term or short-term, depending on the risk-return potential.
Long-term investments deliver higher returns when compared to short-term investments, as the risk is high. Whereas short-term investments carry low risk, low returns philosophy.
In the short-term, one can invest in liquid or ultra short-term funds. In the case of long-term investments, the investor can invest in lump sum or SIP.
To conclude, there are many reasons why investing in mutual funds is a wise investment decision. With the right advisory, choice, and guidance on selection, performance and returns of funds, one can invest irrespective of the time of investment.
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