When Is the Best Time to Start Investing in Mutual Funds?

You might have heard of the different mutual funds and the multiple benefits they provide to investors. The chief among them is that mutual funds cater to various investment objectives. While some people invest to fulfil a long-term financial objective, others look for short-term goals. 

When investors are considering the best mutual funds for their financial needs, they often wonder when it is the right time to invest in mutual funds. 

When Is the Right Time to Invest in a Mutual Fund? 

This is one of the most popular questions among investors. Many people invest in mutual funds at the peak of a bullish market but they may end up selling off their units at a loss when the market spirals downwards in the future. Traditionally, it has been observed that it is wise to invest in mutual funds when the market is low or when the P/E ratio (Price to Earnings ratio) falls below a certain limit. The price to earnings ratio is the ratio of a company’s share (stock) price to the company’s earnings per share.

Today, most financial experts agree that there is no particular right time to invest in mutual funds. For most investors, the right time is when they decide to start investing in mutual funds. Though the ups and downs of the market can result in losses in the short term, the market normalises over the long term. 

Hence it is important for investors to remain invested for a longer investment horizon than timing the market. This lets them realise the full potential of their investments.

People should note that timing plays an important role in mutual fund investments only when they invest for the short term. Investing in funds at a lower Net Asset Value (NAV) instead of a higher one may be a good idea. This will allow investors who have the skills and knowledge to time the market and make short-term gains.  

Some of the ideal scenarios for mutual fund investment are as follows:

• When markets hit rock-bottom
• When bonds generate high returns 

However, though investing in a bear market is considered a good idea, it is difficult to identify the proper market conditions correctly. This can easily be done by professionally experienced fund managers. Investors can choose a suitable investment mode, for instance, SIP (Systematic Investment Plan), which eliminates the need to worry about the time the market is going through. 

But the gist of it is, the ideal time for somebody to invest is subjective and may vary from investor to investor depending on factors like risk appetite, goals etc.

However, when investing, one must try and maintain a steady inflow of investments as much as possible and not take actions like pausing or stopping SIPs or investments or withdrawing their money from mutual funds when they see red in their portfolio due to change in market conditions.

The markets are volatile and averages out the losses with gains over a period of time. It is a patient game and an investor must be ready to see red in their portfolio in phases in the tenure of their investment.

What Factors Determine the Right Time to Invest in Mutual Funds? 

• Investment Horizon

One’s investment horizon depends a lot on their financial goals. If someone wishes to invest in children’s education, marriage or retirement plans, they can consider investing in equity funds for the long-term. On the other hand, debt funds work well for a short investment period. 

• Risk Profile

Evaluating one’s risk profile before investing in mutual funds is crucial. One should only invest in a specific mutual fund if it matches their risk-level. For risk-averse investors, low-risk investments such as liquid funds and ultra-short duration funds are more suitable. 

• Market Condition

Before deciding whether it is the right time to invest in a mutual fund or not, people need to consider the market condition, i.e. whether it is a bullish or bearish market. People with a high-risk appetite and a long investment horizon can invest at any time and benefit from various market cycles. On the other hand, risk-averse investors should consider investing once the market gets corrected, as, after the fall, the markets try to recover the losses incurred. 

• Taxation

Capital gains from mutual fund investments are taxable based on the holding period and type of fund. 

If the holding period is less than three years for debt mutual funds, the short-term capital gains are taxable as per your income tax slab rate. If the holding period is more than three years, the long-term capital gains are taxable at 20% with indexation benefits.

For equity mutual funds, if the holding period is less than one year, the short-term capital gains are taxable at 15%. While if the holding period is more than a year, the long-term capital gains over and above INR 1,00,000 are taxable at 10%.

Why Should You Start Investing in Mutual Funds Early?

• Power of compounding

The process of earning returns from both the principal amount invested and the interest generated is called compounding. This means that returns from the fund get reinvested which leads to more profits. In addition, compounding enables one’s investment to grow quickly, so if a person starts investing early, they will receive better returns upon redemption. 

• Financial discipline 

By investing early and on a regular basis, one can inculcate financial discipline. Furthermore, it reflects the individual’s commitment to their financial goals. Young investors can receive the benefit of early maturity as well. Small and regular investments improve financial discipline in young investors. 

• Wealth generation 

Investing in mutual funds from an early age ensures that one gets ample time to grow a substantial financial corpus. In addition, a long investment horizon enables a person to alter his or her financial strategy as per economic conditions and financial goals. 

Important Tips for Mutual Fund Investment 

Listed below are certain crucial tips that would help mutual fund investors: 

• Do not avoid or delay your investments. Please remember that when you are delaying mutual fund investments, it reduces the power of compounding. As the investment horizon keeps decreasing, the power of compounding also reduces. 
• Investing via SIPs mitigates risks as your investments are spread across a long investment period. 
• Make sure you choose the Mutual Funds that suit your individual goals and risk. While you should check the past performance of a fund, remember that it is not a guarantee of future returns.
• Remember that it takes patience, diligence and discipline to remain committed to one’s financial goals. 

Final Word 

Financial experts have noted that there is no singular right time to start investing. Thus, one should focus on spending more time in the markets rather than trying to find the perfect time.

Frequently Asked Questions