I am 19 years old and planning to invest in a mutual fund. Can you tell me what is the best time to purchase a mutual fund? Should I invest in a debt fund or an equity fund?
S. Kumar, via e-mail
It is good that you have decided to start investing at a young age. To begin with, investment in mutual funds is a step in the right direction. However, if you are thinking of bottom-fishing, then you are on the wrong track. You can know that the market has reached a bottom only after it has happened and, by then it's too late. It is virtually impossible to buy at the bottom and sell at the peak.
So, instead of waiting for the right opportunity, invest regularly in mutual funds, ignoring the ups and downs of stock markets. This is the only way you can reduce the risk of investing as no one can forecast accurately which way markets are headed. Also, it is important that you invest in funds with the intent of staying put for a long time.
So far so good, however, you haven't mentioned your investment objective. Understandable as most investors initially do not set distant goals. Investing has to be goal-oriented, which, in turn, depends on your risk-taking ability. For a young investor, a well-diversified equity fund could be a good option. With almost no liability to speak of, you can afford to take risks and bear some volatility, which is an inherent characteristic of equity investing. If you are looking at a relatively less volatile equity offering, then an index fund is what you need to look at.
On the other hand, risk-averse youngsters can tap bond funds as they are a safe investment. Bond funds neither fetch you high returns nor do they give you sleepless nights. Since these schemes invest in fixed income securities, they are less volatile than equity funds. In case you have a short investment horizon, a cash fund or a short-term debt fund could meet your requirement. The only hitch here is that the minimum investment limit is quite high.
So, stop worrying about market timing and start investing with a goal in mind. Since you are young and not an investment expert, the best strategy for you will be to buy and hold. Through this, you can take advantage of the power of compounding, and the ability of your invested money to make money. Always remember the best time to buy is 'now'.