When is the Right Time to Invest in an Equity Fund?

When is the Right Time to Invest in an Equity Fund?

Financial planning is the crux of effective investing. Also, setting long term, medium term and short term financial goals is essential because you find a direction in which you proceed to achieve these goals through calculated and smart investment. After you have set financial goals, the next thing follows is identifying your risk appetite. Once you know your risk appetite, choosing investment schemes becomes a lot easier. For example, if you are a risk-averse investor then you may settle with conventional investment options like PPF or NPS that offer low but guaranteed returns. But if you are an aggressive investor looking for high risk and rewards offering investment avenues then you may consider investing in equity mutual funds.

What are equity mutual funds?

Before you start with equity funds , let’s just understand mutual funds and how they work. Mutual funds are professionally managed funds that collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. Equity mutual funds are those mutual funds that invest predominantly in equity and equity related instruments. These are a favourite investment product among other mutual fund schemes simply because of the high risk and rewards ratio they offer.

Benefits of equity mutual funds

Equity mutual funds invest a minimum of 80 per cent of their total assets in equity and equity related instruments. This is great for investors with a high risk appetite who seek long term capital appreciation. Equity funds are also ideal for those with at least seven to ten years of investment horizon because these are equity oriented schemes. Historically equity oriented schemes have outperformed their benchmark and provided commendable results to investors who remained invested for a longer time period. It is also because of this why a lot of individual invest in equity for meeting long term goals like building a retirement corpus or securing their child’s college fees and their future.

Also, if you remain invested in equity mutual funds for a longer time period, you may even benefit from the power of compounding. Compounding has the ability to turn small investment amounts into large figures. So if you want to start investing in equity mutual funds, you can do the same via opting for a Systematic Investment Plan (SIP). SIP is an easy and hassle-free process for regular and systematic investing. All you need to do is instruct your bank and every month on a fixed date, a predetermined amount is debited from your savings account and electronically transferred towards your equity mutual. This way, you can continue investing in equity mutual funds until your investment objective is achieved.

When is the right time to invest in equity mutual funds?

If you ask us, the current COVID-19 pandemic has affected the equity markets around the world. This has resulted in the plunge of net asset values (NAVs) of almost all equity mutual funds. Now bear in mind that timing the market is almost impossible and hence, if you want to invest in equity mutual funds, now is the time. Although mutual funds have been underperforming at the moment, as the market recovers this will also lead in the rise of the NAV of these funds. So if you invest now, you may benefit in the near future.

Even seasoned investors have failed in the past to time the market and hence if you are waiting for the market to come down to your expectations before you invest then you are probably living in a bubble which needs to burst now. Invest within your boundaries and your risk appetite. You too stand a chance of getting closer to your ultimate financial goal.

David Lockhart