Is Investing in Mutual Funds a Wise Move for Beginners in August 2020?
The discussion around whether to invest in mutual funds (MFs) can be quite nuanced, especially for beginners. This article aims to address the concerns and offer guidance, focusing on the market conditions of August 2020 and beyond.
Understanding the Returns in MFs
Investing in Mutual Funds (MFs) involves evaluating not only the current market performance but also the long-term potential for returns. In August 2020, there were indeed concerns about lower returns, with examples like the HDFC Balanced Fund underperforming by -35%. This experience highlights the importance of active market monitoring and understanding.
For beginners, it is critical to know that a single underperforming month or even a few months can significantly impact the perception of returns. However, the effectiveness of Mutual Funds typically depends on the length of the investment period and the comprehensive performance over a longer duration.
Investing with a Long-term Perspective
It is generally recommended to have a minimum of a 12-month SIP (Systematic Investment Plan) and ideally a 5-year investment horizon for mutual funds. This long-term commitment helps mitigate short-term volatility and maximizes the benefits of compound interest.
Top-rated mutual funds across categories such as LargeCap, LargeMid, MultiCap, Aggressive Hybrid, and MidCap are expected to provide better returns in the long run. Additionally, Equity Linked Savings Schemes (ELSS) can be a tax-efficient option for those looking to save on income tax.
Timing and Market Volatility
Market volatility often presents opportunities for investors, especially through Systematic Investment Plans (SIPs). SIPs allow investors to invest a fixed amount at regular intervals, which can be beneficial during market dips.
For instance, starting an SIP investment in March 2020, amidst a negative market phase, could have resulted in positive valuations by now, depending on the continued SIP investment. Conversely, starting investments in January 2018 might have led to negative returns due to the prevailing market conditions.
The crash in the share market in March 2020 created a period of negativity for many MF investors. While some investors paused their SIPs, others continued, investing at lower net asset values (NAV) which can be advantageous in the long term.
The strategic timing of SIP investments is crucial. For example, starting a SIP in August 2020 can still be a good opportunity for newcomers, especially considering the current index levels. If one plans for a lumpsum investment, August 2020 might not be the ideal month, and a wait for better market conditions might be prudent.
Similarly, the US presidential election in November 2020 could present another opportunity for equity investors. The potential fall in the market from March to August 2021 should also be taken into account, which makes prudent planning and consistent SIP investment essential.
Conclusion
Investing in mutual funds requires a balanced approach, considering both the shorter-term market conditions and the long-term growth potential. While August 2020 might present challenges in the short term, the right strategy can lead to significant returns in the long term. It is recommended that beginners carefully evaluate their investment goals and timeline before committing to any SIP or lumpsum investment.