Which is the best time to invest in Market

September 2019 was an interesting month for the stock market. The month started on a volatile note with the Nifty falling nearly 300 points and then rallied furiously, gaining nearly 900 points in just two trading sessions on the back of the Corporate Tax cut announced by the Government.

October has begun on a sober note with the Nifty going back to levels seen at the beginning of September. This kind of market movement creates both hope and trepidation depending on the temperament of the investor. In this blog post, we will discuss the nature of market volatility and try to address some of the most frequently asked questions we get from mutual fund investors, e.g. is the right time to invest, should I remain invested in mutual funds etc.

Up and Downs are part of investment journey

Many people who started investing in the last 5 years or so may be experiencing prolonged volatility and deep correction for the first time. Nifty 50 TRI has given nearly 10% CAGR returns over the last 10 years beating gold (8.8% CAGR) and FD (7.6% CAGR), but the journey was not smooth. The chart below shows the price movement of Nifty 50 TRI over the last 10 years.

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If we see the annual returns of Nifty 50 TRI over the last 10 years, the market gave negative annual returns twice, 2011 and 2015. In 4 out of the last 10 years, the market gave unsatisfactory returns assuming you expect equity to beat fixed income returns which on average has been around 7%. Despite underperforming 60% of the times (6 years out of 10), Nifty was able to beat fixed income by a big margin because we had 4 good year for the stock market–2010, 2012, 2014 and 2017. We will get years like these in the future as well, which will make up for the losses / underperformance and generate good returns for you in the long term.

So if you have invested in equity mutual funds and have long investment horizon, you should not panic even your investments underperforms for a couple of years – remain invested.

Which is the best time to invest – Practical difficulty

Buy low and sell high is the age old wisdom in stock market. If we applied this wisdom to the Nifty in the last 10 years then 2011, 2015 and 2016 would have provided the best investment opportunities; during this period Nifty fell by more than 20%. If you invested at or around the lowest points of the market in 2011 and 2016, you could have got 16% – 19% CAGR returns in the next three years.

However, applying this wisdom in your investment strategy is easier said than done. When the market corrects 10 – 15%, there is widespread negativity and pessimism all around. Usually, you will have bad news coming from different quarters and you fear that more corrections are coming. Therefore, you tend to wait unless you are sure that the prices have bottomed out. In my 20 years of experience, I have observed that by the time investors feel confident, the opportunity to buy low is usually long gone.

Difficulty in market timing

Let us understand why it is difficult to time the market a bit more by looking at monthly returns of Nifty 50 TRI over the last 10 years (see the chart below). You will see in the chart below that, while we may see 2 – 3 consecutive down market months, it is very rare to have 5 – 6 consecutive down market months which can provide a degree of comfort to investors that they will be buying low. Corrections are often followed by pullback rallies and then by profit booking which take the market even lower. This makes it very difficult for investors who want to time the market.