Is the market fall the right time to invest in index funds?

What most investors view as a market fall, a few daring ones see the same as an opportunity to buy fresh equity. On the same lines, ace investor Warren Buffett once said, “A market downturn doesn’t bother us. Instead, it is an opportunity to increase our ownership of great companies with great management at good prices.”

Broader market indices have fallen lately, Nifty50 has declined by 15 percent since its peak on October 18 last year.

When we asked experts about this, some suggested that the market correction is usually a good time to buy index funds and exchange traded funds (ETFs). But since it is hard to know for how long the correction would continue, it is suggested that the investors buy mutual fund units via SIPs (systematic investment plan) instead of in lumpsum.

Recently, Trideep Bhattacharya, CIO-Equities, Edelweiss AMC also told MintGenie in an interview that investors should invest in tranches and not lumpsum investments.

There is a popular view that the ongoing decline in financial markets could continue further, especially if inflation stays high, which will prompt the central banks in India and elsewhere to further raise repo rates.

This essentially means that the valuations, which look attractive now, won’t be attractive for long.

Sridevi Ganesh, co-founder of Chamomile Investment Consultants in Chennai, says, “It is a good time to invest but one must understand that the valuations are at an average level – neither at peak nor at bottom. Most good companies and index have yet not reached the 2020 levels. So, it will be good to buy systematically over a period of time. And rather than buying individual stocks, one can buy index funds. One can accumulate over a period of time.”

Invest in index funds

A number of financial experts advise investors to invest in index funds and exchange traded funds (ETF). While expressing his view on this, Ravi Saraogi, Co-founder, Samasthiti Advisors, says “Index funds are great to invest in. But they will also fall when the markets fall. So, SIP will be the right route to go for. If markets go down further, you will get the benefit of averaging.”

About the choice of index funds, he says that the best indices are Nifty 50 and Nifty Next 50.

Ankur Kapur, Founder of Plutus Capital, an independent investment advisory firm, says that a simple strategy – during market correction — is to invest in an index or ETF, but investors should avoid mid and small cap space in this category.

“Markets always discount future events. The current correction maybe a reflection of a fair price. Rather than timing the market, a better way would be to invest irrespective of the market price. A simple strategy is to invest in an index or ETFs. In India, ETFs are evolving but large cap ETFs are still liquid. An investor can pick any index that has high AUM, this will ensure liquidity is notan issue. However, in the mid and small cap space, index funds will have limited liquidity and maybe avoided,” says Kapur.

Rebalancing the portfolio

During market correction, rebalancing of portfolio is also imperative. After a steep fall in the market, the decline in equity allocation is bound to follow. So, this precipitates the need to buy fresh equity in order to rebalance the portfolio, say experts.

Mahesh Mirpuri, an AMFI-registered mutual fund distributor, says, “You must stick to your asset allocation framework. After the market fall, your portfolio is bound to change as per mark-to-market phenomenon, so investors make sure that they reallocate their portfolio from time to time.”