There are a lot of factors that affect your investment decisions and you should be very careful in analyzing the situation. You should consider all the aspects to make an informed decision.
Stock investing is a high-risk high-return financial instrument. The uncertainty related to price movements is risky. Furthermore, stock markets are affected according to economic and other factors. Therefore, you may be wary of investing in direct equities.
To mitigate some of these risks, you may consider investing in mutual funds. Such funds accumulate corpus from several retail investors like you and invest it in equity and equity-related products. The funds are professionally managed by experienced managers to deliver returns.
You may even invest in mutual funds through a Systematic Investment Plan [SIP]. A SIP is an investment plan under which you can invest a small amount at regular intervals in the funds of your choice.
The factors that affect stock markets affect mutual funds too, though not at the same magnitude. So, do not panic and discontinue or postpone investing in mutual funds through SIPs.
The market and NAV see-saw
Because of the volatility in the stock market, the Net Asset Value [NAV] of your mutual fund, mutual fund portfolio remains volatile. However, it is recommended you do not panic and discontinue your investments when the fund performance falls. Lower NAV for mutual funds is actually favourable, as it results in rupee cost averaging. You are able to accumulate more units at a lower NAV, which reduces your overall purchase costs.
Another reason why you must avoid discontinuing your mutual fund investment is to ensure your financial goals are not disrupted. Most SIPs are related to certain long-term goals and discontinuing these due to poor performance may have disastrous outcomes. In all likelihood, you will not immediately move your investment to another fund or financial product. Therefore, you postpone your ability to meet your financial objective.
Thus, you should ignore discontinuing your SIP or mutual fund investments even if markets appear turbulent or slow. These conditions are only temporary, and your investments are long-term. In fact, if you are not already investing, it would be the right time to invest in mutual funds.
Non-performing funds vs. slow market conditions
It is crucial that you carry out a thorough research and then conclude if it is your fund that is under-performing or it the overall market that has slowed down. This is extremely critical because, if the overall market has slowed down, then this would be the ideal opportunity to accumulate more units and invest in under-performing funds.
However, if the research findings definitively point out that the mutual fund you have invested in is underperforming or not performing then it would be a wise decision to switch funds. Nonetheless, it is very important that you immediately start investing in another better performing fund.
Short-term market conditions vs. long-term Investments
Time in the market has always been more reliable and fruitful than timing the market. This approach has always been served well, even to those investing directly in the stock market.
There are many brokers and investors that make money by timing the market, but the risks involved are very high as the market is unpredictable. The risk in timing the market is that you buy an equity, anticipating that it will appreciate in the short-term and then you can sell it and make money. Alternatively, you sell it, anticipating that its prices will fall. However, this may not happen and you may lose your capital investment too.
These risks do not apply to mutual fund investments, as these are for the long-term. The short-term volatility of prices and market affects only marginally on the earnings of such investments, as the earnings herein are dependent on the overall performance of the equity over the long run, and has little to do with short-term fluctuations.
Right time to stop your SIP investments
- It is important you refrain from discontinuing SIP investments until you want to stop investing completely. If you want to stop investing in one fund, you must immediately invest in another.
- Do not make your investment decision based solely on the fund performance. Compare it to the overall benchmark, similar funds, and the fund category to make an informed decision.
- You must not make your choice based on the short-term [two or three months] performance of the fund. If the performance is below average, it will take at least six to nine months before it shows up. Temporary under-performance must not be the basis for your investment decision.
In case your research shows that your chosen mutual fund investment is accurate, consider increasing your investment at dips. Investing in mutual funds requires a little bit of financial planning first, such as what are your investment needs, how much corpus you need to accumulate, after how much time you need the money, and how much risk you are willing to undertake. You can use a personalized mutual fund recommendation platform such as Angel Wealth, which will suggest you mutual funds to fulfill your needs.