If you have already completed your financial planning, your financial adviser must have informed you about the benefits of the Systematic Investment Plan (SIP). The SIP allows you to invest money in a staggered fashion, eliminating the need to worry about market timing. If you are into SIPs, the volatility in the stock will also work in your favour over time. This is known as rupee cost averaging, and it involves purchasing more units when the Net Asset Value (NAV) is low, lowering the cost of owning units.
Whether you like it or not, when you invest a large amount in mutual funds, you must be concerned about market timing. For example, if you invest in the market during a volatile period, your portfolio value may fall by another 10%. That may be rather alarming, particularly if you have a substantial corpus and your portfolio value drops by 10% in a matter of days. To gain a sense of market values, consider market Price to Earning (P/E) ratios and market dividend yield ratios. Market values are very important in lump-sum choices.
An alternative is to put the money in a debt fund or a savings account and wait for higher values. When the P/E and P/BV (Price to Book Value) ratios are below historical norms, it is preferable to purchase in a lump sum than when they are above historical averages. Again, depositing your money in a savings account is not a smart option since you only get 4% each year. A better option would be to invest the mutual funds in a money market fund that can generate more than 6% annually. That is a better use of idle funds. You may also invest in debt funds if you believe that inflation and bond rates will fall rather than rise. After all, bond prices are inversely proportional to bond yields, and debt funds often underperform in periods of increasing rates and bond yields.
Systematic Transfer Plan (STP) offers a simple solution. The STP invests the lump sum payment in a money market fund and sweeps a set amount into an equity fund each month. Your idle funds generate a greater ROI as a result.
Before investing in a mutual fund, an investor determines his or her life objectives and knows his or her risk tolerance. The second stage is to look at the fund's prior performance over the same investing horizon as the investor. Along with performance, the fund's rating demonstrates its dependability; the higher the rating, the better. So, what’s the wait? Open a mutual fund account online now!
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