What is the best time to invest in mutual funds?
Often there are no correct answers. For long term investors, it usually does not matter too much. There is one exception to this rule. If you invest when the market is expensive (like the end of 2010) you will earn little or even negative returns. Similarly, investing after the market has fallen (mid-2013) increases the chances of high returns. But such occasions are rare. Often the market is neither too high or too low. There are two strategies people can use in this case.
Start with a token amount and add each time market falls
This is a personal favorite of ours. First, you start your plan by investing a token amount. Investments in EDGE Bangladesh Mutual Fund (EDGEBDMF) start at BDT5,000 only.
Then each time the market drops by a significant amount you can add to your position. For example, you can set a rule that each time the market drops 10% from it’s high you will add BDT10,000. If it drops 15% you will add BDT20,000. The number can be much higher and lower based on your individual circumstances. This speech by Lauren Templeton at Google sheds light on this.
The market has recently declined by 11% (As of April 20, 2019) after hitting a high of 5,992 at the end of January. This makes it a good time to start investing or adding to the previous position.
Invest using a Systematic Investment Plan (SIP)
A systematic investment plan (SIP) is like a Deposit Pension Scheme (DPS). In a SIP, you invest a fixed amount each month on the same day.
This has two advantages. One it helps people save by debiting the balance each month. There is no hassle as the bank gets standing instruction in advance. Secondly, as investments happen on regular intervals the cyclical behavior of the market is neutralized as the investor buys when the market is both expensive and when the market is cheap.
Both the methods described above can work well. An investor can choose what suits him or her the best. Additionally, a lot of investors invest a lump sum amount and hold it for the long term. Do share with us your favorite methods.