Entering equity market via MFs a great choice

The stock market reached its peak from 50,000 to 60,000 in the past two years. How to enter the market now? Is it a good idea to buy mutual funds now?

- R Ashwini, Bengaluru

The Equity benchmark Sensex, the stock market index, touched a record high above the 60,000 mark for the first time in history. Also, historically, the 30-share BSE index reached an all-time high of 63,580 in December 2022. The Indian market is scaling new heights amid a positive trend in global markets.

Global stock markets, including Europe and Asia, are expected to post an average ten percent gain in 2023. This growth is in line with the average historical returns from World Indices, where equities gained more than 30 per cent. Mutual funds (MFs) had a dream run during the last five years and remain a flavour for investing. Entering into the equity market through mutual funds is always a great choice, especially through Systematic Investment Plan (SIP).

On a year-to-date basis, investors put in Rs one lakh crore investment through SIPs in the previous financial year. When equity markets are scaling new highs, more and more investors are increasingly investing in MFs by taking the Systematic Investment Plan (SIPs) route. We cannot predict the market. Hence make sure your investment portfolio is positioned well in all market conditions. The basics of timing the market, building a portfolio, and diversification of investments are still essential to follow. All this can be a confusing situation for the novice; hence, they opt for a SIP route, which would be a cakewalk.

However, the bull run may continue for an extended period or turn volatile. The golden rule of equity investing is that there is no guarantee that the party will continue forever. The SIP is not always the safest. Therefore, one should always factor in your risk capacity when investing in the equity market, as market cycles are inevitable.

As the name suggests, SIP regularises the investment process by making it automatic. It removes human errors and delays in investing. SIP instills disciplined savings in the investors like a soldier. SIPs make you plan finances and commit yourself to periodical savings. Discipline is a must. One does not need a lump-sum amount to start a SIP. Most MFs have a minimum SIP installment between Rs 100 and Rs 5,000. With the entry-level SIP as low as a hundred bucks per month, investors would be in a better position to invest, and it is incredibly convenient for beginners. It avoids fear as investors need to commit to contributing significant amounts.

One can start a subscription to SIP through a mobile app, online portal, manual through any banking channel, financial service providers, or an AMFI-authorised MF distributor. You can fill out that paperwork with ease. Even after signing for a long-term contribution, there is no compulsion to continue. SIPs are the most straightforward investing tool.

SIP has the most robust investing concepts, and the power of compounding is one of them. The power of compounding always helps smaller amounts grow and fetch decent returns in the long run. A paltry sum regularly compounded over more extended periods makes a big difference in the final results. That is why the Power of Compounding is colloquially known as the world's eighth wonder. There is presumptive evidence that Rupee cost averaging is the primary benefit of investing through the SIPs as it helps you beat market fluctuations.

Due to Rupee cost averaging, your SIP investments become averse to market volatility. You will be allotted more units for the same installment when the stock prices decrease. Inversely, you will get fewer units for the same amount of installment when the market is rallying. Rupee cost averaging is the primary function of SIPs.

One can always increase or decrease the amount of existing SIP being invested in a fund. One can discontinue the SIP plan at any time during the investment cycle. However, the investor requires a minimum of six SIPs to be completed before their discontinuation. You can also switch your SIP from one open-ended scheme to another within the same AMC for better performance and returns.

SIP is the safest form of investment in mutual funds when you have clarity of the time horizon. The lowest duration is three to five years, and the medium time horizon is five to eight years. If you want to go long-term, then keep your investment for ten years and more. The time horizon also depends on the nature of the Mutual Fund and the market cap segment.

The higher your time horizon, the greater the returns and the minimal the risk. With some research and patience, even a tiny contribution to SIPs can be used to build a decent amount of corpus. SIP eradicates market timing risk. The longer you continue your contributions to SIP, the better the returns.

SIP is a remunerative opportunity as it can deliver decent returns over a long investment horizon due to rupee-cost averaging and the power of compounding. SIPs avoid fear if the investor stays committed over a long investing horizon. One can go for ELSS Mutual Funds via the SIP route to save Income Tax under section 80C and get a lucrative return on investment.

(The author is a SEBI licensed

Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic,

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