One of the dilemmas that an investor faces in today’s time are when the right time to invest.
Investor often thinks how to time the investment so as to optimize the return and mitigate the risk.
As it’s commonly said for investments “there is no right time to invest “, thus before thinking of when to invest, trying to time the investments one should not waste the time rather start investing.
But things are not as simple as it seems so. In this article, we would try to understand what is the right time to start investing.
The answer is simple – there s no right time.
The investments are done in the asset classes depending on the performance of that particular asset class and also how it fares with other asset classes.
Markets are always volatile, there is no guarantee of returns in the market, there are evident risks in the equity market but even debt markets are risky though the degree of risk varies from instruments depending upon the objective and allocation of the funds.
Since there is always uncertainty for an investor, be it related to economic condition, political, global market sentiments, trade scenarios between various countries, jobs, and multiple such factors which can be broadly seen as Macro and Micro factors.
Markets seldom tend to move in a single direction for a longer period of time and there are multiple similar risk and volatility attributes attached to the market.
Hence as an investor, it is almost impossible to time the market. The market always rewards for the time spent and the degree of risk taken; returns are a factor of these.
We have listed 5 important points which an investor should keep in mind while deciding when to invest –
- Get the basics right – as an investor more important consideration should be getting the basics right and taking care of the broader parameters.
At the outset, one has to be clear about the goals (click here to know how to set Goals) for which investments are to be done, what is the horizon of investment, what are the risk profile and risk-taking ability of the investor, tax liability, arranging for the required cash flows, etc.
Instead of thinking about the timing of the market.
For example, if the equity market is going up and the bull is on a rise then investors are tempted to invest.
But if one’s goal is buying a car in 2 years then investing without understanding the goal and investing the money in equity market would even lead to loss of capital in case the markets crash after some time or at the time of maturity of goal.
- Avoiding product-centric approach – one of the prevalent practices by investors who do not have enough knowledge and understanding about investments or HNI (High Net-worth Individual) who are not having time to devote to their investments and especially by investors who have distributors/ bankers/wealth managers as advisers are to follow product-centric approach.
An investor is usually approached with products presented with catchy lines such as “this is the real deal”, “it has a different theme”, “this will be a one-time opportunity”, “and this is a new story” etc.
One has to understand opportunities will come and go, there is hardly any such opportunity which could be once in a lifetime and the ones that are such, are very hard to be identified at a very initial stage.
So, as an investor one should avoid product-based investment, and many times products are pushed through to a client which should be avoided.
- Avoiding Behavioral biases – investors are influenced by their behavior while investing.
Usually when the markets are moving upwards (bull phase) and there is an overall positive sentiment then investors tend to invest more.
When the markets are correcting (bear phase) investors tend to sit on fence and are jittery to participate but as an investor one should always buy at a low price and sell at a high price.
Investors get over-optimistic in a bull market when investments are doing good and are open to all kinds of risks ignoring their asset allocation and risk profile.
Whereas in the case of the bear phase they become very cautious and miss very good opportunities as well.
One should do proper research before deciding on the timing of investments and should avoid investing based only on past performance.
4. Thumb rules – There are certain thumb rule that one should be aware of while deciding when to invest –
a) Invest in Debt Mutual Funds when bond yields are high – a higher bond yield will result in a high rate of return if the bonds are held till maturity and will result in a mark to market gain when the yields go down since the price of the bond is inversely proportional to the change in interest rate.
b) Invest in Equity when the market is at the bottom – equity markets tend to be very volatile because of the changing dynamics of both domestic and international markets and it is always advisable to invest when the markets have bottomed out and there is a correction in the market.
Also, SIP is an important tool to invest when there is volatility in the market and it helps in averaging the buying cost over a long period of time in case an investor wants to invest regularly over a period of time.
Whereas for an investor who wants to do a Lump sum (one time) investment he can opt for STP (Systematic Transfer Plan) route where the money is transferred from a source (usually liquid funds) to a target fund (the fund where investment has to be done)
c) Invest in real estate when the prices are low – just like equity asset class real estate should also be bought when the prices have bottomed down.
5. Review – of investments are also equally important as it gives a sense of monitoring of the investments and one has a hold on the overall performance and instead of focusing on the timing of market on can focus on picking right investment solutions and designing the right portfolio according to the goals.