How to make money with mutual funds during the lock down
Social distancing – the fun new social activity that no one really asked for. But here we are, practicing it for the fourth month straight as we try to protect ourselves from the COVID-19 pandemic. People have now started accepting this lockdown lifestyle as the ‘new normal’.
This lockdown, lasting for as long as it has done, has on one hand protected people’s physical well-being, but on the other hand it has negatively impacted people’s financial health through loss of income or losses in investments. Some investors have found long-term investment opportunities in the recent declines seen in the markets while others are still scurrying about trying to find the right time and opportunity to enter the markets to make good of the recent volatility.
To begin with, timing the market is never a good strategy. As investors you should focus on finding the right set of investment products and strategies that could help tide over the uncertainty in the market. At this point in time, investors have two main concerns – lack of funds and worries about heightened risks in the market. Both these concerns can be tackled by simply investing in mutual funds.
Why? Because you don’t need a large pocket to start investing in mutual funds and it can also help you diversify the risk by investing in different financial assets such as stocks, debt, gold, derivatives, among others. Investors can choose to start investments with as less as Rs 500 and gradually build wealth via the Systematic Investment Plan (SIP) route. Additionally, mutual funds help distribute the risk by investing in varied stocks, sectors, and asset classes so that the risk posed by one instrument gets balanced out by the opportunities present in another. Mutual funds can largely be categorized into equity, debt, and mutual fund-oriented schemes. So, investors can therefore choose those funds based on their risk appetite and their financial goals, whether they are short-term, medium-term, or long-term.
Investment blues in the lockdown, anyone?
But in this article, for the sake of brevity, we will talk about how mutual funds can be instrumental in making the most of the uncertainty during this pandemic. The lockdown has seen a lot of people worried about incomes and job security, over and above the fear of getting infected by the virus. This has led to a severe case of the investment blues where people have largely stayed away from investing to avoid losses or to simply hold on to what they have.
But even as we remain locked inside our homes, we can create wealth by investing in mutual funds. You can adopt any one of the following funds or strategies (or all of them!) to remain financially prepared during this lockdown.
The liquid state of being
The big lesson we have all learnt from the pandemic is the need to have liquid assets that can be tapped into in case of an emergency. The need to ensure that we are financially ready to face any challenge, be it a medical emergency, sudden decline in income, or job loss. Creating an emergency fund is a good way to address these issues as you wouldn’t want to disturb your long-term investment plans by dipping into them prematurely to deal with a financial emergency. Your emergency fund should be large enough to manage at least three months of expenditure.
Liquid funds can work as a good emergency kitty where you can park money for immediate liquidity needs. These are debt funds which invest in short-term money market instruments with residual maturity of up to 91 days. Since the maturity period is short, these funds are far less sensitive to interest rate changes which makes them less volatile compared to other short-term funds. However, a small exit load is charged on any redemption request within seven days from the date of investment, after which no exit load is applicable. Instant redemption facility is the cherry on top for an investor, as the redemption amount will be received by the investor on the same day.
Passive is the way to go.
Another strategy to consider at this point is the passive investment strategy by investing in an index fund that simply mimics the underlying index movement. Such a fund invests in the constituents of the index and requires no active fund manager calls. At a time, when markets are volatile and seem to be moving unpredictably, investing in an index fund helps to minimise risk to a large extent. The risk in an actively managed fund is higher because a fund manager’s investment call could go wrong in such a dynamic market. Investing in an index fund could also help even out the risks in your overall portfolio.
Another advantage to these funds is that the management costs of these funds is low. However, there will be some difference in returns as the fund holds some amount in cash for liquidation purposes.
When in doubt, always SIP.
Worried about not having a big corpus to start an investment? Don’t track markets regularly? Don’t know the right stocks to pick? Don’t worry, just go for that SIP. Investing in a mutual fund through an SIP allows an investor to start small, diversify their investments more efficiently, and develop a healthy investment habit.
SIP facility is a periodic investment, where an investor chooses the frequency and amount of investment which can be done on a weekly, monthly, quarterly, half yearly and yearly basis. SIP facility is just like an EMI which helps you build a corpus over time to achieve your financial goals. It has the benefit of rupee cost averaging whereby you buy more units when markets are falling and lesser units during markets are rising. SIP investments over a long period of time comes with the benefit of compounding effect and it also helps manage volatility better.
Don’t time the market
Volatility in the market is unwelcome to all investors. But as an investor, irrespective of how the market moves in the short-term, you should continue to stay invested and not become wary and try to time the market. Over the long haul, markets always generate good returns because it moves in cycles. Every market, even one in decline, provides opportunities to create wealth. If you find yourself wondering what your next investment should be or what investment strategy to adopt, then consult a financial expert/advisor who can help you out.
Creating wealth requires a lot of discipline and patience. Stay invested through the lockdown, so that when markets and the economy stabilize and move up, you will have participated in that growth and not waited on the sidelines for the right opportunity to come by.