Is it a good time to invest in equity?

By Larissa Fernand |  19-04-21 | 
 
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About the Author
Larissa Fernand is Senior Editor at Morningstar.in. Follow her on Twitter @larissafernand

I am a new investor. I have been told that this is not a good time to invest in stocks and equity mutual funds as the market is high. Is there a good time?

This question was sent to us by a reader when the market was high. Today, the market has fallen. I wonder if that individual is still wondering what to do.

If you, as an investor, do not have a strategy at play, you will end up sitting out the market. Or worse, exiting in a panic and incurring a loss on your initial investment.

The question asked is a loaded one, and legitimate too. But given the stock market’s erratic behaviour, there is no right answer. And if you wait for one, you will end up sitting out the market.

Is there ever a good time to invest in the market?

Of course. When it hits rock bottom. Invest huge amounts and then wait for the market to rise. This is timing the market in its purest form, something that is extremely difficult to do. Let me tell you why.

You need to be convinced that the market has touched rock bottom. No one can successfully call out the bottom or peak in advance.

You need immense conviction and confidence to invest when scene is dismal. When the world as you know it is falling apart, will you really invest? Think of the Global Financial Crisis of 2008 or the free fall of global markets in March 2020.

You must have tremendous patience to ride it out. The wait could sometimes be years. Then again, those who invested in March 2020 found that the wait could be just a few months. With the market, you can never say.

You must be willing to park cash in a debt fund when you wait for the fall. And the fall could be a long time in coming. You must also have parameters in mind on what levels you plan to enter the market.

Stocks: Is there a right time to invest?

Let me present you with another question. In 2020, infotech and pharma stocks had a massive bull market, while banking and finance stocks had a bear market. So, was it the right time to buy? The answer is, depends on what you want to buy.

You wouldn’t buy a car without knowing its value. You would not buy a house without knowing what it is worth in terms of location and area of the house, amongst other factors. Why would you buy shares in a company without knowing its Fair Value Estimate, or FVE?

The FVE helps you determine whether the market price of a stock is high or low compared with its fundamental value. When you are aware of that, your decision on whether or not it is a good buy stems from analysis, not hype or fear.

Calculating the FVE involves looking at a company’s financial statements and annual reports, its business and competitive advantage, predicting future cash flows, assessing the management structure and corporate governance. Based on that research, a value is calculated that estimates the value of the company and what one share of stock should sell for if no emotions or headlines or hype from talking heads were involved.

It is an estimate, and there are uncertainties involved. But it is a much more reasonable estimate of the long-term fair value of a stock than “Whatever people are willing to buy it for today.”

So you need to look at the stocks you want to buy and see where they stand with respect to the current market price. That will help you determine whether or not you should buy. Don’t just blindly look at the Nifty or Sensex and wonder if it is time to buy. It could well be that just a few stocks are pulling up the indices. Or, the stocks you want to buy are not part of their respective constituents.

An investor here explains his view in Why I am not buying in this market. Look at the thought that has gone into his stance, and how he looks beyond what the indices say.

Equity Funds: Is there a right time to invest?

You may roll your eyes at the mention of a Systematic Investment Plan, or SIP. But we unapologetically shout from the rooftops that it is the best way to invest in a diversified equity fund over the long term.

This investing strategy works because it latches on to the relevant needs of an investor.

  • The need for convenience. It is very practical. You may not have huge amounts to invest, but you can invest at least Rs 1,000 every month. And once you select the fund and the amount, it is a hands-off approach. You could do an SIP every fortnight or every month or every quarter. The money from your bank account will automatically be debited to buy units of the fund. You decide the amount, the fund, and the periodicity of the investment.
  • The need for consistency. To be a consistent investor, you must do away with constant human intervention. Or else, during market downturns, you may be tempted not to invest at all. Or, when the market scales new highs, you could get carried away by the euphoria. The hands-off approach is not only convenient but prevents you from over thinking.
  • The need to exploit market upheavals. The stock market never moves in a linear fashion. This systematic strategy capitalizes on the market’s erratic movements; you get to buy more units when the market falls. And you are always invested, not sitting on the sidelines.

However, this is only in the case of diversified equity funds. When it comes to sector funds, you need to time your entry and exit. Read 7 questions before you invest in a sector fund.

In closing, there is no simple answer to the question. Pick one that works best for you. Though if this question was asked in the middle of a bear market, I would have simply said, "right away".  

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries ONLY relating to mutual funds and portfolio planning.

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Shridhar Babu
May 28 2021 04:17 AM
 Reading Ninan Joseph's comments along with the articles gives me a good thought process.
raghupathi aravamudhan
May 16 2021 11:29 PM
 The Author spell out fundamentally., don't buy on high price which is very correct. My experience states Rule .1. Go to quality company means leader in particular sector preferably large cap. Rule.2. Buy one quantity. Rule.3. Be patience to know how price is moving and finally you will learn by yourself ., quite interesting subject learning thru mistakes and experience.
Larissa Fernand
May 9 2021 09:21 PM
 Hello Shashank,

The reference to stocks was for investors who have invested directly in the stock market. The reference to SIPs was for investors who invest via equity mutual funds. The reason I tackled both under separate sub-heads is because the approach for each would be different.

And in some cases, like mine for example, I use a mix of both. I buy stocks directly as well as do SIPs.

Thank you for your feedback. I do appreciate you taking the time to share your views.
Shashank Gupta
May 9 2021 12:31 AM
 The article is full of irony. On the one hand the author says "So you need to look at the stocks you want to buy and see where they stand with respect to the current market price. That will help you determine whether or not you should buy." On the other hand author 'unapologetically shout from the rooftops that SIP is the best way to invest in a diversified equity fund over the long term.' How can one look at the stocks and see where they stand while investing in SIP? The reasons given for investing in SIP are more from the perspective of convenience and self-control rather then any real benefit derived from it.
ninan joseph
Apr 24 2021 06:23 PM
 The answer to the most difficult question is given in this para by the author

"You wouldn’t buy a car without knowing its value. You would not buy a house without knowing what it is worth in terms of location and area of the house, amongst other factors. Why would you buy shares in a company without knowing its Fair Value Estimate, or FVE?

Absolutely agree. Once you know which company to invest in, ups and downs should not affect you. As you get to see the current market value on a daily basis, this causes unnecessary angst (when it is lower) and euphoria (when it is higher), just ignore this. Just like you are not going to sell your house just because someone comes and offers it at a higher price nor will you buy your neighbours house just because they offered it at 10% discount.

The challenge is finding the right company to invest and trying to find the right value. If you find this difficult by doing research, go for simpler options which millions use ETF. When you invest in Nifty 50, you are investing in India's top 50 company.

Go for ETFs in case you have a Demat account or uncertain.
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