Here’s Why You Should Sit Back and Relax When Investing in Equity Mutual Funds
Financial planning is crucial to ensure financial stability and freedom. An important aspect of financial planning includes investments. You choose various asset classes such as investing in mutual funds (MFs), debentures, government securities, equities, deposits, and many more.
All these different investment products have pros and cons. Debt instruments like deposits and government securities offer fixed albeit low returns. On the other hand, products like MFs and equities are riskier due to market fluctuations and price volatility.
An important thing to remember while financial planning is to consider your investment horizon and risk profile. If you have a long-term investment horizon, MFs and equities are able to deliver higher returns. However, if you are averse to higher risks, these may not be appropriate investments. In such instances, debt instruments are advisable.
Another crucial factor is to stay invested irrespective of the market movements. Short-term events may adversely affect the market conditions. However, it is recommended you do not modify your long-term investment plans based on short-term market movements.
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Why should you not time the market?
You may want to earn profits by buying at a lower price and selling at a higher price and vice versa. However, accurately predicting the price movements and market conditions are almost impossible even for seasoned investors. Therefore, it is advisable that you do not try to time the market.
Using technical and fundamental analyses to predict the bottom and top almost never works. Most traders who have tried to time the market have made losses. Thus, to ensure you do not lose your hard-earned money, stay invested for the long-term and avoid timing the market.
When there is uncertainty in the market, you may be concerned about the performance of your mutual funds. Here are three things you must do during such times.
1.Stay invested if your objectives are at least five years away
When you invest in any financial product, it is important to relate it to a specific life goal. If your financial objective is at least five years away, it is recommended you stay invested even if the market conditions are volatile. Historical charts show that investing in equities either directly or through MFs delivers inflation-adjusted returns during the long term. Price volatility during the short-term is much higher and therefore, remaining invested is a better option.
2.Reduce equity exposure if your goals are medium term
If your life objectives are in the medium term (three to five years) away, it is recommended you reduce your exposure to equities and equity-related products. You may exit some of your investments when the prices are high to book profits. You may then invest in mutual fund balanced schemes, which invest about 65% in equities and balance in debt-related instruments. This allows you to benefit from price increases and mitigates your risk with the debt products.
3.Avoid risk if your goals are in the short-term
If your financial goals are within three years, it is important that you exit high-risk instruments. During the short-term, the equity markets are highly volatile and adverse price movements may result in huge losses. The risks are so high that you may even lose your capital investment during the short-term.
It is recommended you develop a de-risk plan to ensure you exit in a streamlined manner. Irrespective of the index level, exiting risky investments is important as your financial goals draw nearer. Preservation and protection of your capital investment is a crucial component of the entire financial planning procedure.
As your goals approach, it is advisable to invest in mutual funds debt schemes. You may include short-term debt or money market funds to move your investments from the equity funds.
When you shift from high-risk to low-risk products, ensure the process is gradual and not sudden. You must stagger the exit in monthly or quarterly installments using a disciplined approach. Moreover, avoid timing the market as you follow your de-risk plan. You must adhere to your schedule irrespective of market conditions and price movements. Finally, you must not ignore this procedure, as it is an important component of overall financial planning.
