Well, that’s easy. Today! It’s always a good time to invest! So ask not the question. Instead, here’s what you should ask – “Where should I invest?” This will answer your timing question, indirectly. But here’s why we say it’s always the right time to invest.
Before we get to it, write this down – the purpose for which you’re investing and the number of months or years you will be investing for.
Then remember four points (or write this down as well, if you tend to be forgetful – and keep it someplace safe so you can come back to it when you get jittery).
- equity is high-risk, high-return and fixed-income is low-risk, low-return
- equity will deliver over 5 years or more and will fluctuate in this time
- long term allows taking higher risk and short-term means lower risk
- you’re not investing only once, but at multiple times throughout your life.
There’s an investment for every need and time
Investing to save taxes? There’s obviously no “right” time. You need to do it every year! Even if you are to invest in equity tax-saving funds (which invest in stock markets), you need to hold it for three years or more. This mitigates the timing problem (refer your note).
Investing for your retirement several years down the line? Or because you know it’s a good thing to do? Timing still does not matter. For longer-term goals, equity investments are the best option. Compared to other options, equity alone holds the capacity to deliver inflation-beating returns. And when your holding period is longer than 5 years, whether stock markets are rising or falling today should not matter. As mentioned above, equity delivers well over time despite fluctuations in the interim. You don’t need the money tomorrow so if your investment drops 5% next week is not a problem.
Saving up to buy a car next year? Want to meet the down payment for a home three years from now? Your horizon is short. You can’t invest in equity (refer point 3 in your note). It certainly is not a good time to be investing in equity funds or stocks. But that doesn’t mean you don’t invest at all. You can go for low-risk options such as debt funds, equity savings funds, or fixed deposits. It is still the right time to invest. You’re just investing in a different instrument.
You can turn falling returns to your advantage
The timing question usually pops up in equity investing. You may be worried that you’re investing at a peak or whether stocks can fall even more and you should wait for the bottom. Before explaining about this worry, add a fifth point in your note – there is no way anybody, market expert or newbie, can ever predict whether the market is at a peak or has bottomed out. It is only in hindsight that we know market cycles. So again, you cannot time your entry into (or exit from) equity markets. All you can do is to invest and hold for the long term.
But yes, market fluctuations are concerning. So remember that you’re not investing just today. You will be investing at multiple points. This will allow you to invest at various times through market cycles. Should the market correct, buying through this period will allow you to invest at cheaper prices. If markets are trending higher, waiting it out will simply mean missed opportunities. So investing regularly is the easiest way to solve the timing problem.
The best route for this is systematic plans in equity funds. SIPs also need to be run for 3-5 years, which will allow you to invest across market cycles. If you do have a large sum to invest at one go, spread it out so you avoid timing your investment wrong. Fix your equity funds. For each of these, pick the liquid fund from the same fund house. Then set a systematic transfer plan from those liquid funds into the equity funds for 4-6 months. This will ensure that you do not put all your money in at peaks or lows. If you’re directly investing in stocks, you still can invest at multiple price points in your stocks.
There’s only two instances where timing is important. One, if you’re a trader who makes money off short-term market movements. That’s not investing for the long term and therefore doesn’t form part of this discussion. The second is if you’re considering sector-specific funds, funds built on themes such as manufacturing or consumption, or gilt funds.
Themes and sectors are not perennial and can completely go bust. You need to catch the theme around the time it is gathering momentum, and get out when the tide turns. Similarly, pure gilt funds need a timed entry when yields are high and an exit when they bottom out.
So there you go. Next time you’re wondering if it’s the right time to invest, stop. Know the purpose for investing and your timeframe, and pick the right product.