FAQ: Why Now Is a Good Time to Invest in Mutual Funds

Should we take the mutual fund route to start investing? Here’s all you need to know.

(Photo: Altered by The Quint)

Video Editor: Vivek Gupta

The kind of wealth destruction we have seen in recent weeks due to coronavirus pandemic has been unprecedented in history. In a matter of days, share markets the world over wiped out years of gains. Such was the ferocity of selling that even record easing by global central banks could do nothing to arrest the slide.

One question on everyone’s mind now is whether to enter the market, when the going is so tough. Have we already seen a bottom and a recovery is round the corner? Should we take the mutual fund route to start investing? If we are already invested, should we book out to protect ourselves from further erosion?

Why should we say ‘Mutual Fund Sahi Hai’?

In the last 40 years, the return from Indian share market has been better than all other asset classes in the country. According to a Mint’s analysis, if you had invested Rs 10,000 each in bank’s fixed deposit, gold and Sensex (a benchmark consisting of top 30 companies reflective of the performance of share market) in 1979, your return would have been Rs. 2.68 lakh, Rs 4.08 lakh and Rs 45.28 lakh in 2019.

The compounded annual growth rate of Sensex at 17 percent all through has been better than any other asset class.

And this has happened despite several instances of carnage along the way, the most notables being the rout following the Harshad Mehta scam, the one immediately after the dotcom bust and the most recent one being after the collapse of Lehman Brothers in 2008.

In fact, Sensex fell as much as 33 percent in September and October of 2008 only to recover very sharply from 2009 onwards.

The numbers clearly show that share market has always outperformed all asset classes in the long-term despite several hiccups along the way. And for those who do not have time to follow the rigours of investing, mutual funds – with experts managing thousands of crores of investors’ money – remains a preferred route. Research shows that many of the mutual funds have given better return than the benchmark indices.

Why should we believe that the carnage will be over soon?

The current share market rout has been caused by health concerns following the coronavirus pandemic. Most of the economic activities have stopped as a result. There has been no destruction of economic assets though. Nor has any big company gone bust, posing any systemic risk.

While sudden stoppage of all economic activities will have its own sets of challenges and therefore impact company’s earnings and its share price, we can be reasonably sure of a recovery once the lockdown comes to an end in most parts of the world.

We know for sure that there has been destruction of demand in India and elsewhere. We don’t know the extent of it and we can’t be sure of the pace of recovery. But a revival sure is round the corner and that will push up prices of shares.

What if economic revival is muted and share market remains flat for months?

There is no easy answer to the question. However, if past performances give us any clue, we can be reasonably sure of a swift recovery in the share market. Share market recovery almost always precedes the real uptick in economic growth.

Moreover, with unprecedented liquidity injection done by leading central banks like the US Federal Reserve, the European Central Bank and Bank of Japan, too many dollars are likely to chase assets across the world.

US Federal Reserve alone has injected close to $6 trillion into the economy post the corona crisis. This is way more than what the US central bank had done post the Lehman crisis. The ECB launched a $800 billion asset purchase programme as early as 19 March to support the financial sector.

Experts reckon that once the dust settles, risky assets like shares are likely to become major beneficiary of unprecedented liquidity injection.

We saw that happening post the global financial crisis. There is no reason why that should not happen this time too. If that happens, emerging markets like India will likely attract billions of dollars.

But how to choose funds to invest in?

Please check the track record of funds and fund managers before putting your money to work. While past performances don’t guarantee that a particular fund or a fund manager will outperform peers, an informed choice always minimises the risk.

The decision to choose a sectoral fund (infrastructure, power, financial services etc.) over index fund should be based on your risk profile. Similarly, you can choose to prefer small cap funds over large cap or mid-cap funds if you are confident about faster growth of smaller companies vis-à-vis others.

All such decisions must be based on your risk profile, time horizon of your investment and your assessment of how the economy is going to perform in the next few years.

It is always advisable to consult a certified financial planner before taking such decisions.

Why choose mutual funds? Why not invest directly in shares?

The risk of putting all your money in a company’s share or a set of companies is always higher than a fund that invests in a basket of well-tracked companies. Then there is the advantage of your money being managed by domain experts who know what they are doing. If you are risk averse and want your money to grow at a reasonable rate over a period of time without bothering to track the daily movement of share prices, mutual fund is a preferred route.

Should you book out at the time of market turmoil?

The honest answer is an emphatic no. Unless you need money urgently, it is not advisable to book out when the going is tough. Selling your mutual fund portfolio now means selling at a loss or at a significant discount to what you were getting three months ago. There is added disadvantage of missing out on a possible recovery in the market.

Iconic investors always suggest investing when there is fear and panic all around. Since a sense of panic has gripped the market now, price correction in many companies has been way more than warranted.

Once the panic is gone, such exaggerated moves too will disappear and markets will start behaving in a more orderly fashion.

The analysis, however, holds true only if coronavirus is brought under control quickly. All bets are off if that is not the case.