When the stock market is bullish, should one invest in equity mutual funds? Investors grapple with this question when they want to start a Systematic Investment Plan (SIP) in equity mutual funds. New investors should understand that a bull market is favourable for investing in equity mutual funds.
Generally, investors believe that if the market is at high levels, investing will yield lower returns, which eventually reduces overall earnings. Currently, the BSE Sensex is above 70,000. However, at present, there are no indications of it falling below this level. In this scenario, is it the right time to invest? It should be noted that there’s no bad time for SIP in mutual funds. However, there is no guarantee of returns on investment in mutual funds, but even during a bull market, you may get better returns through SIP.
Now let’s understand how SIP works. Through SIP, you invest a small amount in mutual funds every month, which can yield good returns over the long term. One should continue investing with discipline, whether the market is rising or falling. When the stock market is at its peak, you’ll receive fewer units, and when the stock market is declining, you’ll receive more units. Let’s understand this with an example. Let’s say you start an SIP of Rs 5000 every month, and the Net Asset Value (NAV) of the mutual fund is 10 rupees. You will purchase 500 units. If the next month there is a bullish trend and the NAV becomes 11 rupees, you will get 454.5 units for 5000 rupees. Comparatively, this is 45.5 units less than the first month, but the value of the units from the first month will increase to 5500 rupees. Therefore, even though fewer units are received during a continuous bullish market, you will earn higher returns.
This way, if you Rs 60,000 through SIP in a year, then the investment will rise to 85,721 rupees in a year. This is just an example. The return on investment in mutual funds depends on the direction of the market. If there is a significant downturn in the market and the NAV falls to 8 rupees, you will receive 625 units that month. You will benefit more when the market returns to its previous levels.
Overall, investing through SIP in a rising market would be a prudent decision. Mohit Gang, co-founder and CEO of Moneyfront, suggests that regardless of market fluctuations, one should continue investing in SIP. If there is a downturn in the market, you can purchase new units of mutual funds. Even if the market is at a peak, you can still make new investments.
Reducing the SIP amount, pausing it for some time, or aligning it with the direction of the stock market can lead to greater losses for you. In the long run, these steps can negatively impact your portfolio. Consistency in SIP is the key mantra.
Predicting whether the stock market will rise or fall is difficult. It is better to patiently invest in mutual funds for long-term, so there is no bad time for investing in SIP.
(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)
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