Is This the Right Time to Invest in Equity Mutual Funds?

Are you wondering whether now is a good time to invest? Feeling the urge to cash out and sit on the sidelines? These are the kinds of questions that plague even the most seasoned investors.

The Sensex has soared to an all-time high of 71,500, leaving many investors wondering if now is the time to jump in or if it's better to wait for the market to fall.

A couple of days back, I received a call from a friend, “Ugh, I missed it. If only I had invested sooner” referring to the recent market surge that saw the Sensex climb to an all-time high.

He had been waiting for the perfect entry point, convinced that the market would eventually dip offering him a chance to buy in.

The truth is that nobody can predict the market's future with absolute certainty. Even the most seasoned experts make mistakes, and trying to time the market is risky.

Why We Behave This Way

Fear and greed are the two big emotions that drive investors. The problem with fear is that it often leads us to make irrational decisions. We see the market dip, and instead of staying calm and analyzing the situation, we panic and sell our investments, often at a loss. This is exactly what we should NOT do.

On the other hand, greed can also be a powerful motivator. We all want to get rich quickly, and this can lead us to take unnecessary risks or make impulsive decisions. This can also be harmful in the long run.

The stock market, like the weather, experiences cycles of sunshine and storms. Bright, sunny days of growth are followed by periods of downturns. Just like storms eventually clear up, the market's tough times also eventually improve.

If we know a crash is coming, why not wait to invest? Or, if already invested, why not sell, wait for the dip, and then buy back in?

Unfortunately, the answer is simple: we can't predict when the crash will occur or end. Nobody does.

The Perils of Market Timing: Why the Genie's Advice Won't Help

Suppose a magic genie informs us that the Sensex is at its peak of 71,500 and a crash is imminent. We promptly sell our investments, but then the question arises: when do we buy back in? Is it a mere 10% pullback, allowing us to re-enter at 64,000? Or is it a full-blown bear market, requiring us to wait until the price dips to 57,000?

But what if we do that and it turns out this is a crash!! Damn! In that case, we should have waited until it dropped all the way down to 50,000. Where’s that pesky genie when we really need him??

To play this market timing game even once, you need to be right twice: First, you need to predict the peak. Then, you need to accurately forecast the bottom.

Given the Challenges of Market Timing: What You Should Do Instead

Instead of trying to time the market, a long-term investment strategy offers a more reliable approach. Consider the following:

1. Focus on Decades, Not Years:

Imagine you are in your 30s or 40s, with 20 or 30 years of investing ahead. Instead of focusing on short-term gains, shift your perspective to decades. This allows you to ride out market fluctuations and benefit from the market's long-term growth trajectory.

2. Historical Perspective:

Think back to 1994, when the Sensex was at a mere 3,400. Despite experiencing challenges like the 1990s political instability, the Kargil War (1999), the dot-com bubble (2000), the US financial crisis (2008), and even the COVID-19 pandemic (2020), the Sensex now stands at a staggering 71,500. This demonstrates the market's remarkable resilience and ability to recover from even the most significant setbacks.

Should You Invest at all?

Instead of asking "Should I invest now?", shift your focus to a more critical question: Should you invest in equity mutual funds at all?

Answer this truthfully:

• Are you comfortable with the possibility of your wealth being cut in half?
• Can you stay the course despite market fluctuations?

Ultimately, the decision is yours.

If you want to improve your investment performance, the single most powerful tool at your disposal is increasing your time horizon. Remember, time is your greatest asset when it comes to investing.

Reflect on 2020:

• Did you find yourself panicking and selling off your equity mutual funds during the market downturn caused by the COVID-19 pandemic?
• Or did you remain calm and stay invested, trusting in the long-term recovery of the market? Share your experiences in the comments below!

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Follow me, Ravi Nagrani , for more insights on personal finance and investing