When Should You Enter Equity Funds?

Are you looking to invest for inflation-beating returns over time? Do you want an investment that helps you attain your long-term financial goals? You may consider investing in equity funds. It helps you get exposure to a professionally managed investment that has the potential to generate returns above inflation over time.

You have the stock market indices, the Nifty 50 and Sensex, more than doubled from their lows during last year’s lockdown. It has created a dilemma for first-time investors who are looking to invest in equity funds. However, studies have shown investors are more confident of entering the equity market when it is rising rather than falling. When should you enter equity funds?

What are equity mutual funds?

You have equity funds investing primarily in stocks of companies. The fund manager chooses large-cap, mid-cap, and small-cap stocks or invests in stocks across market capitalisation based on the fund’s investment objectives. 

You also have diversified equity funds where the fund manager picks stocks across sectors and industries based on the fund’s objectives. These funds spread your investment across different sectors, reducing risk in the portfolio while giving broad exposure across the equity market. 

You have sector funds that choose stocks from only one sector. Moreover, you may consider an equity-linked savings scheme or ELSS, a tax saving mutual that qualifies for the Section 80C tax deduction up to a maximum of Rs 1.5 lakh per financial year. 

When Should You Enter Equity Funds?

You may consider entering equity funds after a fall in the stock market. It is the best time to invest a lump sum and wait patiently for the stock market to rise. You may consider this approach as timing the market, which is extremely difficult as you cannot accurately predict when the stock market would rise or fall. 

You need immense confidence to invest in a falling stock market. For instance, would you invest when there is a global financial crisis and stock markets worldwide are crashing? However, this remains the best time to enter the stock market, provided you have the patience to wait until the market rises after several months or years. 

You have the Indian stock markets hitting new highs regularly. It means investors could struggle to enter equity funds at higher levels of the stock market. You could invest in equity funds through the systematic investment plan or SIP. It is a way of regularly investing small amounts of money in a mutual fund scheme of your choice. 

You can invest in equity funds at any time or at any stock market level through the SIP. It helps you avoid timing the market and focus on staying invested in stocks over the long term. 

Why invest in equity funds through the SIP?

You may invest in equity funds through SIP to get the benefit of rupee cost averaging. For instance, when you invest a fixed amount regularly in units of equity funds, you end up investing across stock market levels.  

You will buy more units of the equity fund when stock markets are down and lesser units when stock markets rise for the same amount, thereby averaging the purchase price of units over time. It is called the rupee cost averaging benefit, which protects you from short term volatility in the stock market.

You may invest consistently in equity funds through the SIP. For example, many investors do not invest in equity funds during a stock market downturn, thereby losing opportunities to invest at lower stock market levels. However, SIP investments ensure that you remain invested even during a stock market correction and build wealth over the long term.

You must avoid timing the stock market if you want to build wealth through equity funds over the long run. Otherwise, you will be chasing the stock market, and it’s tough to grow your wealth. In a nutshell, you must invest in equity funds through the SIP if you want to avoid the hassles of choosing the right time to invest in equity funds. 

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For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in