Top 5 things to consider before buying mutual funds in 2020
Updated: May 25, 2020
When whole world is fighting with Corona virus aka Covid-19, no one has thought of such a large spread. Almost all the countries are affected with the Corona virus but in terms of damage, at the time of writing, situation in United Stated of America, Italy & Spain is very bad. As on 18th Apr, 2020 around 2.2 million people across world are affected. Death toll is more than 1,54,388.In America itself total Corona virus positive cases are 7,10,272. When big economies are suffering than it will definitely impact the rest of the world. It is impacting the world at large extent. Stock market is down around 20-20% from its peak. Since stock market is at lucrative level, people tends to look for quick money by investing in stocks or mutual funds.
Here there are top 5 points to consider while buying mutual funds in year 2020.
1. Top 5 things to consider
There are many points which is required to be considered while buying equity related instruments. Here I would suggest to know in details of your investments, analyze them properly and then further invest. All the below information is for the information purpose only.
1.1. Do not invest Lump sum untill there is vaccine for Corona virus
Currently market is at low level. Many experts are believing that market have been already touched the low and it is the time to invest to make money. If the investment horizon is very long term then it may not impact but you need to remember that currently market is reacting based on the expectation. If government is coming up with some relief package then market is reacting. If US is announcing something then market is reacting. At the core still there is no vaccine for the corona virus. Till vaccine is not available, it is very difficult to call that low has been reached. Every day corona positive cases are increasing.
Best way for investment in this situation is to divide the money in 4-5 parts. Example if someone wants to invest Rs. 1 Lacs than it is better to divide it into at least 4 parts of Rs. 25000/ each. Then invest in installment. This will help in cost averaging.
1.2. Be careful while buying sector specific funds
Sector specific funds are those funds which invest in a particular sector. You may get different advice for the mutual fund investment. Some sees the current situation but some look at future aspects. Some may suggest to go for Steel sector fund or funds related to tourism sector. The main reason for the some would be that, there are sector which have been beaten a lot. Their assumption, may be for some time it is going to the same story but after that stocks will move fast. If so than the funds concentrating to those sector will give good return. I would say, do not fall into that trap by simply believing. You need to have your own analysis before buying sector specific mutual funds. If I can suggest then I would suggest funds based on FMCG sector and Pharma sector. In this current COVID-19 situation, this two sector can outperform. It is equally important to know the list of companies forming the mutual fund basket.
1.3. Avoid Mutual fund investment using borrowed money
It is never advisable to invest in equity market using the borrowed money. This time, it is tempting a lot as market is already 20%-30% down from their peak. There are stocks which are more than 60% down from their peak. It looks like that return would be more to compensate the interest on borrowed money. Please do not fall into this trap. Please look out and see the current situation. Till vaccine for corona virus is not available, do not assume that market is at low to make money. You may heard that Sensex and Nifty 50 are at a level which is good for investment. Having investment using the borrowed money also caused the behavioral changes. It may possible to make some money at the first but later on, it is a trap. So avoid mutual fund investment using borrowed money.
1.4. Do not assume big return in short duration
When market makes big moves, it becomes the discussion topic. Newspapers, News channels, expert friends all talk about market condition. Many as market expert suggest to invest in stock market. Knowing the kind of research required to buy the single stocks, they suggest to enter market via mutual fund root. At the same time they suggest to buy a particular fund. When buying mutual fund either due to some influence or with your own analysis, you always need to remember that equity market investment is for long duration investment. While buying mutual fund at this level too, do not assume that since market is at low level so mutual fund can give good return quickly. This assumption is not correct. Again I am saying that market is behaving based on the expectation. Currently people are busy in discussing the economic impacts and some issues relevant to corona virus. Even after vaccine for the corona virus will be available, there would be whole lot of other thing.
· Mental health of the people.
· Unemployment problem due to country first policy.
· Recovery time to different sector.
· Inter relationship among different countries.
· Countries future course of action to revive the economy.
· After the relief package government action to run the economy…..
1.5. First know the difference between Active funds and Passive funds and then invest.
If you are the first time investor to mutual funds or you are already investing in mutual fund. It is important to know the difference between the active funds and passive funds. In the current context when market is at low level, you should know the mutual fund investment strategy. Active funds are those on which fund manager plays critical role to decide the different instruments in fund portfolio whereas passive funds are those funds in which fund managers have little to do. Currently market is reacting based on the expectation so for the fund manager too, it is not easy to pick the right instrument. Index funds are passive funds and track the indexes. I would say to start SIP in direct index fund. If the idea is to have SIP of Rs. 10000/- SIP with investment frequency of every month. I would suggest to start the SIP but at the same time invest Rs. 10,000/- extra per month for at least next one year to get the good advantage.
Even though market is at good level for the investment, there are certain rules that needs to be followed. Just looking at the current level to decide on investment is not going to be the deciding factor. Till vaccine for corona virus is not available, market can move to either direction. Mutual fund investment is right decision to avoid different risk however mutual fund investment should be for duration at least 2 years or till the target is achieved.