Should we time the market while investing in mutual funds?

If you think timing the markets will give you more returns, there is a fair chance that you might be wrong.

Should we time the market while investing in mutual funds?

It isn’t easy to make money by timing the markets. Investors who try to time the markets usually lose out because of timing errors. You need to do research and invest with discipline and patience to make money in the stock markets.

Uncertainty and volatility have increased in recent times. This has caused confusion and investors are unsure of what they should do next. Should they invest through SIPs or STPs? Should they buy on dips? Should they follow a buy-and-hold strategy? Or, should they sell and wait on the sidelines?

It isn’t easy to find answers to such questions. However, investors can use tried and tested strategies that have worked in the past.

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Why timing the market doesn’t work

Volatility and uncertainty are a part of investing in stock markets. Markets go up and down and we have no control over them. However, we do have control over how we react to these changes. Time and again, research has proven that to be profitable while timing the markets one has to be right consistently 7 out of 10 times, which is not achievable feat for most investors.

You can withdraw from the market when you believe that it is very high. You may think that this will help you to lock in your gains. You will also be ready to re-enter the market at lower levels when it corrects.

This may not work out as expected. If you miss out on the few good days when the market rises, your returns, in the long run, will be lower. Bear markets tend to be shorter than bull markets, which are more powerful and last longer.

Those who try to catch the market tops and bottoms are likely to miss out on the best days. Most people lose money while trying to find market tops and bottoms. Even the top investors in the world have not succeeded in timing the market over time.

This means that an investor who stays invested will earn higher returns. One who tries to buy low and sell high may lose out.

Also read: 5 Surprising Investing Truths

Decide your asset allocation first

It pays to invest in a systematic way on the basis of a sound asset allocation strategy. Pick the right investments for your goals, return expectations, period and risk tolerance. Invest according to your plan regardless of market valuations. You can invest more at times when market levels are very low.

A buy-and-hold strategy works well for most investors. There is no need to withdraw your money when the market seems to be close to a top. The right time to exit from investments is when your goals are close.

It’s important not to let emotions cloud your judgment. Greed and fear are an investor’s biggest enemies. They drive us to make irrational decisions that reduce long-term returns. All you need to do is to invest according to your plan and allow your money grow over time.

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The right time to invest is now.

The best time to invest in the stock markets was yesterday. If you missed that opportunity, today is an excellent time to start. Any further delay may result in lost opportunities. You will miss out on returns, and the market may move to higher levels.

Investors tend to fret about entering the market at the perfect level. They want to earn exceptional returns. There’s no need to be nervous about timing your entry. Consider your asset allocation first. Pick investments that are in line with your profile.

It’s best to stagger your investments over some time. Invest a small amount at regular intervals to reduce the risk of catching a market top.

Invest more in debt and less in equity for short periods. Invest more in equity and less in debt for long periods. Review your investments every 6 months or year to see if everything is going according to plan. There is no need to review your investments every day or to make frequent changes to your portfolio.

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Invest via STP or SIP to reduce risk

You can set up a systematic transfer plan (STP) to stagger investments in equity mutual funds. To do this, invest a lump sum in a liquid fund, which offers a reasonable return and has no exit load.

Set up an STP that will transfer a fixed amount to an equity mutual fund of the same fund house. A specified amount will move from the liquid fund to the equity fund every week or month. This will help you to average out your investments over time.

This is much safer than investing a lump sum in an equity fund at one go. Your money will be earning a return while it is in the liquid fund.

If you want to invest at regular intervals, you can set up a systematic investment plan (SIP). The SIP will transfer funds from your bank account to the mutual fund.

The bank will transfer a specified amount every month. This means that you are less likely to spend it on impulse purchases. A SIP is the best way to build a large corpus from your regular income over a period of time.

Spend time in the market instead of trying to time the market

You can earn handsome returns by spending time in the market. A buy-and-hold strategy works well for most investors. If you remain invested, you will enjoy the power of compounding.

You need to follow your asset allocation strategy while investing. Track your investments and rebalance your portfolio when your asset allocation changes. If your equity investments lose value, you can transfer money from debt to equity. If equity exceeds your planned allocation, you can transfer funds from equity to debt.

This has proved to be one of the most effective ways of profiting from stock market investments. You also need to monitor individual investments regularly.

If your fund has not been performing as well as its benchmark and category for 3 years, switch to another fund. Sell risky investments about 2 years before your goal and move your money to safer options.

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Conclusion

You can earn good returns by spending time in the market rather than trying to time the market. Decide your asset allocation and invest through SIPs or STPs to reduce risk. Track your investments and rebalance your portfolio when your asset allocation changes.

About the author

KishorKumar Balpalli, believes that financial literacy and discipline is the key to one’s financial freedom. KishorKumar is a Certified Financial Planner, Personal Finance Blogger & the Founder of myMoneySage.in an award-winning Wealth Management platform. myMoneySage simplifies investing for individuals and amplifies business growth for Registered Investment Advisers by leveraging Artificial intelligence and machine learning. The AI of the machine plus the intellect of the human advisor enables comprehensive & client-centric advice at a fraction of the cost of a conventional adviser.

myMoneySage.in is an award winning personal finance platform. It helps you aggregate all your personal finance accounts like FD, Equity, Mutual Funds, PPF EPF, NPS including, Credit Cards & Loans etc. It's one place where you can track, plan and invest seamlessly. myMoneySage.in empowers you to invest in zero commission direct plans of mutual funds thereby helping you generate higher on investments. The best part is it comes with a lifetime Free plan.


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