Young investors often ask…Is it the right time to start investing in mutual funds? By “Young Investors” I mean someone who has never invested in mutual funds. If you are such an investor, this article is for you. For you, the timing of investment in mutual funds will depend upon your financial situation, investment goals, risk appetite, and market conditions.

Mutual funds have long been considered a popular investment vehicle for long-term wealth building and achieving financial goals. For considering saving and investment, it is never a bad time. However, new investors should always avoid investing in shares directly. A mutual fund is a much better way to invest in the market.

One should always start investing as early as possible in life. It is also important to stay invested long term, as the magic of compounding works in the long term. But how much is long-term? Mr. Buffett says that his investment horizon is forever. But looking at the past performance of mutual funds in several market cycles, it is better to remain invested for at least seven years. In seven years, the probability of making a loss becomes too small (though it does not vanish).

Right Time to Invest through SIP

You should start investing using a Systematic Investment Plan (SIP) facility in a mutual fund. SIP is a process where an investor automatically invests an equal amount every month at a fixed date. Investing every month helps in rupee cost averaging. So, when the market goes down, more units are bought at the same investment amount. Also, while invested long term in SIP, the benefits increase due to power of compounding.

Automatic investment at the start of the month

Making the process automatic means, one does not have even to plan or think about making investments. This is useful in keeping emotions away. Whether the market is good or bad, a fixed amount gets invested without the intervention of the investor.

Choose performing mutual funds

Mutual funds giving better returns than their benchmarks should be selected for investments. From the sea of mutual funds, you can also look at thirty mutual funds selected by MoneyControl (MC30). Always look at the annualized performance of five years first, then three years, and then one year. A fund that is consistently giving top returns in 5 years and 3 years periods, while charging a low fee, can be considered for investments. While selecting funds, equity and debt funds can be selected as per the risk appetite of the investor.
If you do not trust a mutual fund manager, then you can invest in index funds. Index funds are passive vehicles with lowest cost structure. Again there are multiple index fund options available. Index fund should be of lowest cost, lowest tracking error and of good mutual fund house.

Regular review

You should regularly review of your mutual funds, as it can help eliminate non-performing funds with higher exit loads, expense ratios, etc. You should give at least three years to mutual fund, before replacing it. If equity fund is giving an average XIRR of more than 16%, then you should continue in that fund. If returns drop below 15%, then cautiously watch the fund for some more time. If it drops below 12%, while benchmark returns are much higher, then you should take out money and reinvest in performing funds.

Conclusion

The above guidelines are for new investors. After spending some time in the market, you can understand the risk-reward ratio. Then you can think of increasing your investment horizon by investing in other asset classes. Please note that selection of a mutual fund is a simple yet important process. You should give proper thought to equity-debt ratio and asset allocation before starting your investment journey.