The Sensex has corrected more than a 1000 points since the Budget of 2018 re-introduced Long-term Capital Gains tax. To add to that, the global markets corrected sharply around the same time too.Should you invest lump-sum right now?
The LTCG tax was imposed on gains greater than ₹100,000 on the sale of equity shares and equity oriented units of a mutual fund.
Given the recent turn in events, there has been a lot of speculation and contemplation as to what should investors do with their investments- should they book profits immediately to avoid LTCG tax or should they invest more funds post the market correction?
Read more: 7 Things You Should Know About LTCG.
Any investment decision should be guided by the objective of the investment after a thorough fundamental analysis. In simple words, investors should not try to time the market and be lured by the fact that market has undergone a correction.
Policy changes and market corrections are a natural phenomenon and keep taking place from time to time. An attempt to time the markets may be counterproductive for the investors, ultimately leading to the destruction of wealth.
While a market correction may lure the investors to enter the market at lower prices, investors must realize that patience and discipline are two of the most important attributes of value investing.
Markets move up and down from time to time. It is commonly said that ‘Mutual funds are subject to market risks’ and that equity funds are risky. It is important to note that such fluctuations impact the short term.
Over the longer investment horizon, such fluctuations get ironed out and wealth is created for the investors.
Systematic Investment Plans
SIP or Systematic Investment Plan is a disciplined and a systematic way of investing your money in mutual funds. An SIP is an option of investing a fixed sum in a mutual fund scheme on a regular basis i.e. predefined regular intervals.
Read more: 13 Things to Know About SIP.
It is similar to regular saving schemes like a recurring deposit. It encourages investors to save money and in the end, they can redeem better returns.
A few features of SIP are – investors don’t have time to keep an eye on the market and hence can pour in money into SIP. In SIP, one can also get the benefits of compounding i.e., you can reinvest the interest earned from the SIP. In the long run, it can make a huge positive impact on your returns.
Investing via SIP mode gives to the investor the benefit of rupee cost averaging. It irons out any fluctuations in the market and provides the benefit of compounding over the years. This approach does not rely on timing the market for highs and lows but focuses on the idea that markets are supreme and they generate compounded returns over the long-term.
Systematic Transfer Plans
STP stands for Systematic Transfer Plan. STP is an automated way of moving (transferring) money from one mutual fund to another. This plan is chosen when one wants to invest a lump sum amount but wants to avoid the marketing-timing risk. When investing via STP, you essentially transfer your money from debt fund to an equity fund.
Read more: What is STP and why it is important.
STP ensures that an investor’s money is unaffected by any short-term volatility in the market. This allows investors to shift their investments from one asset type to the other, depending upon the market situation among other factors.
In short, STP helps keep investors’ money safe during times of extreme market volatility such as recent events post budget, while providing consistent returns to meet the investors’ targets.
What is critical for long-term value creation is the understanding that the markets enable wealth creation as the irregularities get ironed out in the long-term.
Therefore an attempt the time the markets for investing at lows may not be a good idea as one cannot know for sure whether the downtrend shall continue or not.
Disciplined investment with the help of tools such as Systematic Investment Plan and Systematic Transfer Plan may be a good way to earn returns from the market in the long run.
However, investment mode for each investor could differ according to the investment objective, the risk-return tradeoff, the amount of money available for investment, among others. A decision should be made accordingly.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.