Planning the investment journey is an important decision that one makes in their lifetime. All of us invest to achieve important goals such a buying a house, buying a car, financing children’s education, getting married, retirement planning and many more. Apart from the financial element here, these goals are also emotionally important to us.
As such, we make sure to put in the best research and invest our money. Mutual funds are a popular choice amongst investors, given their returns, liquidity and professional management.
An important question that comes up in the minds of us investors here is, ‘What is the right time to invest in mutual funds? At the outset, let us answer this question – the moment you decide to start your investment journey is the right time to invest in mutual funds. Before we delve further into this, it is important we understand more about mutual funds. Let us begin with the basics!
Investment in mutual funds can be done in 2 ways!
- SIP – Systematic Investment Plan
- Lumpsum.
SIP – is a pre-decided amount that will be deducted periodically from the registered bank account on the specified date.
Lumpsum: a single sum of money, typically invested at one time rather than in smaller, periodic instalments.
Now let us look at the parameters that one should bear in mind before planning their investments (Note: these parameters are not all-inclusive but are among the important ones).
- Purpose of Investment:
When you start investing; the investment objective should be clearly defined. Distinguish if your goal and its time horizon are definitive or flexible. If you aim for higher long-term returns, you should be open to taking on more risk and might consider investing in pure equity funds. On the contrary, if your goal is capital protection, you can consider low-risk investments that offer relatively lower returns.
- Investment Horizon:
Different categories of mutual funds are available depending on your time horizon, with debt funds suitable for short-term and pure equity funds for a long-term horizon. Mutual funds do not come with any lock-in period except ELSS funds, which have a lock-in period of three years. An aggressive or riskier portfolio can be built if your investment horizon is longer, but if your investment horizon is relatively shorter, then conservative funds are more apt.
Let us understand the different horizons (Note: these serve only as a general point of reference and can vary based on personal factors)
- Short-term Investment Horizon: The short-term investment horizon refers to an investment expected to last about one to two years. This investment would be appropriate for investors whose retirement is near, may need large sums of cash soon and need to park their money. Debt funds can be a suitable choice for this type of horizon as they are relatively less risky and can be liquidated more easily.
- Medium-term Investment Horizon: The medium-term investment horizon refers to an investment expected to last about three to six years. This investment would be appropriate for investors who want to save for their personal goals such as buying a car, school/college fees or marriage. Given a medium-term horizon, hybrid funds can be considered suitable investments as they provide exposure to both equity, which provides higher return potential and debt, which provides portfolio stability.
- Long-term Investment Horizon: The long-term investment horizon refers to an investment expected to last six or more years. Goals such as wealth creation, buying a house and a child’s education planning are generally considered long-term. Pure equity funds are appropriate instruments in the long term as volatility smoothens out, providing balanced risk-adjusted returns.
- Risk tolerance: Every fund has different risk characteristics. Few asset classes are risky, such as pure equity funds, whereas other asset classes, like debt funds, are relatively less risky. Depending on its category and style of management, each mutual fund carries a unique amount of risk. An investor should decide which asset he can invest in depending on his risk appetite and financial ability.
Coming back to our primary argument of ‘What is the right time to invest?’ and why it is advisable to start as early as possible. The answer is simple – Compounding. Postponing the investment diminishes the power of compounding.
Let us understand the power of compounding with a simple example of three friends who invest Rs. 2000 per month. Their retirement age is 60, but they start investing at different ages.
| Person | Age | Investment term (years) | Investment Amount (INR) | Future Total Value at Retirement (INR) |
| A | 25 | 35 | 8,40,000 | 1,29,90,538 |
| B | 30 | 30 | 7,20,000 | 70,59,828 |
| C | 35 | 25 | 6,00,000 | 37,95,270 |
Note: Assumed rate of return is 12% p.a.
Even though they have all earned the same rate of returns per annum on their investment, A, who started investing early, has a considerably higher corpus at retirement. Another surprising fact is if ‘A’ stops his SIP when he is 55 (i.e. a 30-year period) and leaves that amount to compound till he is 60, he still would have a higher corpus than ‘B’ and ‘C’ of Rs. 1,24,41.828. Therefore, starting the investment journey early is a boon if you want to build a considerable corpus for your financial goals.
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To conclude, there is no perfect time that is ideal for an investment. We should cultivate the habit of investing regularly and with discipline. The two mantras to achieve your financial goals are: The best time to invest is now, and the best way to invest is regularly.
