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Is this really a good time to invest in shares or equity mutual funds?

This is a frequently asked question by most investors.

The two main reasons being:

  1. The feeling that investments in shares haven't gone anywhere in the last few years
  2. The volatility of the stock market

Interestingly, the same question is also asked when the market has run up due to the fear of having to invest at the top.

This dilemma is best answered by investor John Templeton’s quote, "The best time to invest is when you have the money", a quip which holds a lot of wisdom and science. Long-term investors should not concern themselves with the daily or weekly movements in stock prices or market benchmarks.

Regular investors who lack the time and/or knowledge for stock selection and monitoring and who want to benefit from investing in the stock market should take the mutual fund route. However, one requires realistic expectations when investing in shares or equity mutual funds.

Some interesting stats

Over a thirty-year period, stock market investing in India delivered a 16% annualised return; multiplying an investment more than 100 times! This is the best amongst all other investment options, beating Gold (17 times), FDs (18 times) and Silver (21 times). A notable point here is that there were significant variations from the average in this journey.

Our analysis of historical market data using monthly Sensex values has shown that:

  • There is a high probability (67%) of achieving a return greater than 15% and an even higher probability (75%) of achieving a return greater than 12%.
  • This return expectation is for investors investing at any random point in the last 30 years and holding for 7 years.

However, for a three-year holding period this probability drops to 50%. So clearly, investing in equity mutual funds is not for short term horizons.

Investors must be aware that investing in equity mutual funds is not appropriate for all investors and situations. Investment options that best matches their investment duration and goals must be chosen.

  1. Investors with a short time horizon should go for less volatile options such as debt funds, balanced funds and/or FDs.
  2. If your goal is very near term and completely non-negotiable, choose fixed return options.
  3. Such decisions must be taken knowing fully well the lower return expectations.
  4. Be prepared to invest higher amounts to achieve the same target amount.

Final word

  • Stock market investment is a great long-term option for those with realistic expectations, who ignore daily/ weekly movements and avoid timing the market.
  • Diversified equity mutual funds provide the best options to invest in equity.
  • Investors must consider the duration of their goals before choosing between equity and debt funds.
  • Choose the fund manager with care.

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