5 things to consider when investing in mutual funds during market high
What is a mutual fund?
One of the first questions potential investors get while recommending mutual funds to potential investors is, “What are mutual funds?” In simple terms, mutual funds are a type of investment tool that is a professionally managed investment fund that pools money from several investors. The fund manager uses the pool of funds to buy securities. The fund manager invests the funds in different securities such as bonds, stocks, gold, and other assets. The resulting gains or losses on the investment are shared collectively by the investors in proportion to their contribution to the fund.
What are the advantages of investing in mutual funds?
Here are some of the significant advantages of investing in mutual funds:
Investors of mutual funds can enjoy professional help:
One must have a certain amount of skill to invest in financial markets. If you consider investing in mutual funds, you must thoroughly research the market and determine the best investment options available. Apart from that, you need to be knowledgeable about things such as macroeconomy and the different sectors from an asset class perspective. Simply put, all of this requires significant time and commitment from you. But, if you don’t possess the skill or the time to research the market, investing in mutual funds may be an excellent alternative. In these schemes, a professional fund manager takes care of your investments and works to provide reasonable revenue. For their work, you must pay specific fees for the professional management of your mutual fund investments. In a mutual fund, a fund manager regularly takes care of investments and rebalances the portfolio to meet the scheme’s objectives. Professional portfolio management is one of the most important advantages of a mutual fund.
There are tax benefits:
Another benefit of mutual funds is that investors can claim a tax deduction of approximately ₹ 1.5 lakh by investing in equity-linked savings schemes (ELSS). As per Section 80C of the Income Tax Act, investors can enjoy this tax benefit. However, it is important to remember that ELSS funds have a lock-in period of 3 years. Therefore, if you are considering investing in ELSS funds, please remember that you can withdraw your money only after the lock-in period. Other than tax benefits for ELSS, another advantage is the indexation benefit available on debt funds. In traditional investment tools, all interest earned is subjected to tax. However, in the case of debt mutual funds, only the revenue earned over and above the inflation rate is subjected to tax. Through this benefit, investors get to earn post-tax revenue.
Mutual funds are affordable:
Prospective investors are often concerned that investment tools might be expensive. While some tools might be costly, the same can’t be said for mutual funds. The minimum initial investments for most mutual funds are affordable.
Mutual funds offer liquidity:
These funds can be easily redeemed, i.e., liquidated if an investor has some financial emergencies. A mutual fund portfolio can be redeemed on any business day, i.e., whenever the market or banks are open. This ensures that you have easy access to your money. After redemption, the redeemed amount will be credited into your bank account within one day to 3-4 days, depending upon the type of scheme. In the case of liquid funds and overnight funds, the redemption amount is paid to the investors on the next business day.
Things to consider while investing in mutual funds when the market is performing well:
The market is a highly volatile investment space. Sometimes, the market performs well, and they go through a bear phase. While investors might be hesitant to invest in the market during a bear phase, they might not feel that cautious when it performs well. But that does not mean the investor should throw caution to the wind. Listed below are the five things that one must keep in mind if you are investing in a mutual fund scheme when the market is performing well enough:
Re-evaluating the investment portfolio:
Just imagine this scenario: The market is currently at its peak and enjoying its all-time high. Looking at the market, you may feel inclined to withdraw your investments. But before making a decision, please get in touch with a good financial advisor and re-evaluate your portfolio. If you are a pure equity investor, some of your investments can be shifted to sort funds. Taking this action might protect your assets in case of volatility.
Diversifying the investment portfolio:
Instead of withdrawing your investments from the investment portfolio, you can systematically transfer your portfolio to international, commodity, or debt funds. Doing so might mitigate risks from your investment portfolio. You may also continue your systematic investment plan, as a balanced portfolio might protect your portfolio from value erosion.
Re-evaluate the investment goals:
If the mutual fund scheme helps you to achieve your goals, it’s time to re-evaluate them. If you followed aggressive investing before, you could now follow a slightly conservative policy. Instead of withdrawing, you can set up newer goals that will assist you in moving your money efficiently. Doing so might help you to avoid falling into traps.
Do not stop SIP:
Rupee cost averaging is one of the biggest benefits of SIP. Essentially, it averages out your purchasing costs over the tenure of the investment period. Through this, wealth is created in the long term. Therefore, do not liquidate your SIP at any cost.
Do not try to time the market:
Timing the market is a mistake every investor has made during their investing journey. Doing so results in missed opportunities, and timing the market may lead to erroneous decisions that can hamper the growth of an investment portfolio. Remember, the time in the market is more important than the timing of the market.
Apart from the five above, please do not hesitate to invest in the market regardless of market conditions. Rise and fall are part and parcel of the market. An experienced financial advisor can help you formulate a strong economic plan that can help you create wealth in the long term.
Disclaimer: Mutual Fund Investments are subject to market risks; read all scheme-related documents carefully.
