Clickable arrow icon In this article
6 Mins

Is it a good time to invest in mutual funds? This is one of the most commonly asked questions. The best time to invest in mutual funds was 10 years ago, 1 year ago, or even 1 day ago. Confused? Well, it means that anytime is the best time to invest in mutual funds. Trying to time the market and investing is not the right way. Buying low and selling high is everyone’s dream. But how many of us are actually successful at executing this correctly? What you may think is a low may not actually be the bottom. Similarly, what you may perceive to be high, may not be.

When to Invest in Mutual Funds?

You don’t have to worry about timing the markets when investing in mutual funds. This is because, with mutual funds, you can invest a fixed amount at regular intervals. Systematic Investment Plans (SIPs) help you invest the desired amount every month, quarter, annually, etc. Investing at regular intervals eliminates the need to time the markets.

For instance, if you choose to do monthly SIPs, you will be investing a fixed amount every month in the chosen fund. When the markets are low, you will accumulate a greater number of units of the fund. On the contrary, if the markets are high, you will acquire a lesser number of units of the fund. Thus, regular investing will help you manage market volatility. 

Therefore, the best time to invest in mutual funds is now.

Invest Now

Don’t delay your investment any further. The sooner you begin your investment, the greater growth you can potentially see. To elaborate, you can generate higher returns when your investment horizon is long. Therefore, to ensure time is on your side, you must start investing as early as possible.

Let’s understand this with an example. Let’s say Ms Pranati started investing at the age of 25 years for her retirement (at 60). While Mr Vignesh starts investing for his retirement at the age of 30. Both of them invest in the same fund and earn similar returns. Their monthly investment amount is INR 5,000. Let’s see how much return they make at the end of their investment tenure.

ParticularsPranatiVignesh
Monthly Investment Amount₹5,000₹5,000
Investment Tenure35 Years30 Years
Return*12%12%
Maturity Amount₹3,24,76,345₹1,76,49,569

Note: *We’ve taken an investment portfolio that returns 12% annually to calculate the maturity amount.

From the above table, you can see that by starting investment five years early, Ms Pranati is able to generate almost INR 1.5 Cr additional returns. You can see for yourself how the power of compounding works when your investment horizon is longer.

Therefore, don’t postpone your investments. Invest now. Have a long-term investment horizon to generate significant returns through the power of compounding.

Things to Determine the Best Time to Invest in Mutual Funds

While investing in mutual funds, you need to keep in mind the following things:

1. Investment Objective

While investing, it is always advisable to invest in a goal. In other words, investing with an objective in mind and having a financial target for it will assist you in identifying the right funds for it. For example, you can have a goal to buy a car, create a fund for higher education, a retirement fund, or buy a home. The investment objective can be anything; you need to set a target amount you wish to accumulate for the goal.

2. Risk

The next important thing to consider while investing is your risk tolerance levels. With a high-risk tolerance level, you can invest in assets that have a higher growth rate but are also exposed to greater risks. On the other hand, if you are not a risk seeker, you can invest in low-risk investment options that offer greater stability and safety at the expense of growth rates. Thus, you need to analyse your risk tolerance levels before investing in mutual funds or any other investment instrument.

Equity mutual funds are high-risk investment options;  this means that they aim to generate higher returns than other types of mutual funds, by investing in equity. 

On the other hand, debt mutual funds are low-risk funds compared to equity schemes. These funds invest across debt instruments that are less volatile than equity schemes. 

3. Investment Horizon

The investment horizon is vital in picking the funds for your investment goal. For instance, if your investment horizon is short-term, avoiding a high-risk scheme is advisable. Thus, equity mutual funds are unsuitable for a short-term investment horizon. 

Similarly, if you have a long-term investment horizon and are willing to undertake some risk with your investments, equity schemes are best suited. Since equity funds invest in stocks, they are considered to be highly volatile. To average out the effect of volatility, you need to have a long-term investment horizon.

4. Mode of Investing

You can invest in mutual funds through a lump sum or SIP route. Lump sum investing is when you invest a significant sum at once in a fund. On the other hand, SIP investing allows you to invest a fixed amount at regular intervals. 

Through SIP investing, you need not worry about timing your investments. Investing in small amounts regularly will help you generate a significant corpus over time. Therefore, SIP investing helps you systematically build the desired corpus.

Read: SIP vs Lumpsum Investing

5. Taxation

While picking an asset for investment, you need to be well aware of the tax implications. Capital gains from mutual fund investments are taxable based on the holding period and type of fund. 

If the investment 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. On the other hand, if the holding period is more than three years, the long-term capital gains are taxable at 20% with indexation benefits.

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

Furthermore, ELSS mutual funds are the only type of mutual funds whose investment qualifies for tax deduction under Section 80C of the Income Tax Act, 1961.

To Conclude

The best time to invest in mutual funds is now. Don’t speculate; instead, invest. With mutual funds, you need not worry about managing your investments, and you can invest the desired amount regularly. 

As a mutual fund is made up of a basket of securities, the investment is relatively well diversified, and you don’t have to worry about timing your entry and exit. The fund manager takes care of it. Therefore, all you need to do is pick a date for your SIPs, invest for the long term and enjoy the benefit of worry-free automatic investing. 

Also, it is a must to hold your investments for the long term to average out market volatility. Furthermore, you must focus on picking suitable funds for your investment goal and investing regularly, rather than tracking the market sentiments and trying to time your entry and exit.