Does waiting for market correction help when investing for a long term in Mutual Funds?

To invest or not is the question???

the budget day

If you are among those investors who are always wondering what should be the investment strategy when the market is fluctuating then read on.

We gets loads of questions from investors asking whether they should invest or not since the market is too high or a correction is expected. Our answer is always the same, if you are planning to stay invested for a long term then it doesn’t matter. Still not sure?

Suppose there are 2 scenarios. In one you invest Rs 60,00 in SBI Mutual Fund at a NAV of Rs 50 and in the other you wait for the market corrections and then invest the same amount at a NAV of Rs 49 again in SBI. In scenario 2 you are allotted more units since the NAV is lower.

Now in scenario 1, you wait for 5 years and sell your 1200 units at a NAV of Rs 103 and in scenario 2 you feel the market will fall so you sell your 1224.49 units at Rs 92 after 4.5 years.

In both the cases the fund is the same ie SBI Mutual Fund and the returns of fund is 15%. Looking at the two scenarios where do you think you made more profit and why? It is obvious that you accumulate a higher amount in scenario 1 even though you invest at a higher NAV and get lesser units.  Wondering how?

The answer is simple, it doesn’t matter at what price you buy, what matters is how long you stay invested and the NAV at the time of sale. The same principal applies to SIP investments. The price can fluctuate and if the difference is not too much then the value of your investment will depend only on the investment period and the NAV at the time of selling.

Buying price matters only when you wish to invest only for a short while. This is because then your money has lesser time to grow and the only way to make higher returns is if you buy at a much lower price. This strategy is used by stock traders for intra-day or short term trading. It makes sense for the share market but not for Mutual Funds since the NAV of top ranking funds do not fluctuate too much.

At Mintwalk, we rate funds based on the consistency of their performance. This means these funds are more stable and less volatile. the top rated funds give high returns more regularly for the same amount of risk and their NAV fluctuation is also lower.

Bottom line, if you plan to invest for a few years at least then it doesn’t matter how high or low the market is. Your money will always do a better job when its invested than sitting in your bank account waiting for you to decide.

Written by Preeti Chauhan
Certified Financial Planner & a newbie Runner