Index funds have become extremely popular among investors, especially in developed economies. In India, many investors have also started investing in index funds.
Since these funds can be used to create long-term wealth cost-effectively, index funds have gained popularity among investors.
But generally, when the underlying index does not perform well or remains range bound for some time, people ask themselves whether they should take the money out of the index fund and invest elsewhere. Is it the best time to invest in index funds?
Should investors time the market before investing or keep investing? Is it the right time to invest in the index fund, etc.? Let us dig deeper into this.
Before we jump on to these questions, let us go back to the basics!
What is an index fund, and why should you invest in them?
An index fund is a mutual fund that invests in stocks listed in a particular index. This is the passive way of investing.
The fund manager does not apply his expertise and is just required to invest the funds in the shares of companies of a particular underlying index.
Due to this, index funds have the lowest expense ratios among all the types of mutual funds. The returns generated by index funds are like those generated by the underlying index.
Index funds are simple to invest in. You mitigate the risk of underperformance of the fund manager as you get a return like an index.
As said earlier, index funds are cost-effective because of their low expense ratios. Due to all these benefits, it is possible to create wealth using index funds over the long term and hence you should consider them.
What is the right time to invest in index funds?
Generally, investors prefer a particular fund when it is performing well. Investors start to question the same fund when it does not perform well.
We must understand that the markets are highly unpredictable in the short term. They can move in either direction like a drunken man.
For some time, they can also be range bound, where they will not show any extreme movement in either direction. But in the long term, markets are supposed to go up for developing and growing economies like India.
In index funds, since the fund manager does not manage the fund actively, you get the return like the underlying index’s return.
Due to this, in the short term, when a particular index is not performing well, your fund will also not perform well, and it is possible to see other actively managed funds outperforming the index fund.
But this can be used as an opportunity to accumulate the units and average the cost of investments. By averaging the cost, you will benefit in the long term when the markets pick up momentum.
A pause in the investments can harm you in the long run. As it is said, “The best time to plant a tree was 20 years ago; the second-best time is now.” Similar is the case with investments. You need to keep investing continuously, maintain discipline and stay patient.
You may lose a significant opportunity if you try to time the market. You may pause your investments while waiting for markets to correct, and the markets may not correct and rise only, and hence you may lose an opportunity to invest at comparatively lower prices.
By consistently investing, you will get the units at both lower and higher prices resulting in averaging your cost per unit. Your consistency and patience will be rewarded in the long run.
Hence the right time to invest in index funds is right now.
