There is always a debate in the mind of investors regarding where to invest when to invest, and how much to invest. Besides investment In LIC Policies, Shares, Bonds, Bank FDs, and Savings Account, Mutual Funds have gained great popularity among the investors due to its flexibility.
Mutual funds fund is a financial vehicle created from the money collected from investors to invest in securities like money market instruments, bonds, stock, and other assets. In other words, it is a professionally managed investment option controlled by Asset Management Company that collects the money from a group of people and invests their money in securities with an aim to generate capital gains or regular returns for the investor’s fund.
A mutual fund is an opportunity for the individual or the small investor to get exposure to professionally managed portfolios of equities, debt funds, and other securities. Mutual funds can be bifurcated into categories that represent a kind of security investor invest in, investment objectives, and type of returns investors expect.
The value of the Mutual Fund companies depends on the performance of securities the company has purchased. Therefore investment made by the investor in a mutual fund unit means that the investor is buying the performance of the company’s portfolio or a part of portfolio value. Share of mutual funds indicates investment in many different stocks instead of just one holding and therefore mutual fund shares do not hold any voting rights for the investors.
Today, in the current scenario investors are more curious about the right time to invest in mutual funds.
There is no such rule regarding the best time for investing in mutual funds but it is always better to invest during Bearish Market when all the funds are available at lower NAV rather than the higher prices.
When there is a prolonged decline in prices of securities the market is said to be the best market. Main markets are often interrelated with the decline in the overall market or indexes like S&P 500. If individual securities are commodities that are experiencing a decline of 20% or more over a consistent period of time it can also be considered to be in a bear market. A bear market is generally partnered with economic downturns like a recession.
Bearish markets are considered to be a good time for investment when the market performance is worse, the investor can get better returns in medium – long term horizon. During Bearish Market, an existing investor investing in SIP should increase the amount of investment, and the prospecting investor should invest so as to avail benefits like Rupee Cost Averaging, Power of Compounding, and Top-Up Facility.
Should you continue with your SIP in Bear Market
Systematic Investment Plan (SIP) in mutual funds carries distinctive advantages. They are –
- It gives the benefit of rupee cost averaging and reducing the overall cost of acquiring units.
- When markets are down investors could get more units with the same amount invested and when the market goes up the NAV of the fund rises.
- SIP in mutual funds is a good option to coincide with your investment with regular income and capital appreciation.
Hence, it can be concluded technically that an investor should continue SIP in the share market so as to avail the benefits of the power of compounding as well as adding more value to the portfolio.
The benefits of investment during the Bearish Market
- Rupee Cost Averaging
One of the significant benefits of SIP (Systematic Investment Plan) is that it controls the risk of investment through rupee cost averaging, thus allowing the investors to purchase more units when the prices are low and to bring down the average cost per unit. Continuing SIPs during the bear market helps the investor to get more value for money thus increasing your returns when the markets regain.
NUMERICAL EXAMPLE:-
| · TIME | Amount Paid | Price per share | Number of shares bought |
| Jan- 2017 | 2000 | 40 | 50 |
| Feb- 2017 | 2000 | 48 | 41.67 |
| Mar- 2017 | 2000 | 42 | 47.62 |
| Apr- 2017 | 2000 | 34 | 58.82 |
| May-2017 | 2000 | 28 | 71.42 |
| Jun- 2017 | 2000 | 30 | 66.67 |
| Jul- 2017 | 2000 | 50 | 40 |
| Aug- 2017 | 2000 | 42 | 47.62 |
| Sep- 2017 | 2000 | 44 | 45.45 |
| Oct- 2017 | 2000 | 32 | 62.5 |
| Nov- 2015 | 2000 | 36 | 55.55 |
| Dec- 2017 | 2000 | 40 | 50 |
Total Investment: Rs. 24,000
Total number of shares bought: 637.32
Average price per share: Rs. 37.67
- Power of compounding
Compounding is the initial step towards the long term wealth creation. Compounding allows an investor to earn interest on principal amount along with the interest on reinvestment of interest earned earlier. It helps the investor to build a large Corpus over a period of time with a small initial investment. In other words, the gained amount on investment is re-invested with the initial capital to increase the principal for the next compounding year and get the benefit on the gained amount also.
The considerable part of compounding is that continuing to reinvest interest on investor eventually reach a point with the amount of money reinvested will become greater than the original principal amount.
Let understand with an Example, Mr. X invested Rs 10,00,000 lumpsum as initial investment @10% return every year.
| Year | Principal Amount( If Mr. X keeps the interest aside) | Interest Earned | Principal Amount (If Mr. X reinvest the interest earned) | Interest |
| 1 | 10,00,000 | 1,00,000 | 10,00,000 | 1,00,000 |
| 2 | 10,00,000 | 1,00,000 | 11,00,000 | 1,10,000 |
| 3 | 10,00,000 | 1,00,000 | 12,10,000 | 1,21,000 |
| 4 | 10,00,000 | 1,00,000 | 13,31,000 | 1,33,100 |
| 5 | 10,00,000 | 1,00,000 | 14,64,100 | 1,46,410 |
| Total ( Principal + Interest) |
15,00,000 |
16,10,510 |
- Top up facility
Top up facility give some option to the investor to increase the SIP installment by a fixed amount. During the bearish market top-up facility helps the investor to accumulate the wealth faster along with increasing the income.
Article Written By-
Naina Rupani- Management Trainee – TVC
FOSTIIMA Business School
