I am happy to note both the readership and the reactions to my last post on how I planned to buy my large cap oriented MF now. As some of you have rightly pointed out the general framework of investing can be tried out for other categories of funds too, of course the relevant indices would be different. Also, it is possible to track the Mutual fund NAV itself instead of index levels but that data is not easily available. Maybe some reader can try to make a calculator that outputs such information readily. The method will definitely be better if you have information about 200 DMA for the relevant MF NAV etc.
Now many people have got back to me and said that even though at a logical level my plan makes sense there are a few serious issues if they try to implement it. Let us first outline those issues before I respond to them:-
- What will happen if the market keeps going up as in a bull run – does it mean we do not buy MF at all?
- You want to buy at a particular level, but the markets may go down more.
- I may not have 20 % of my planned investment with me when it is time to buy the MF based on your suggestion.
For starters, I think it is very unlikely that we will have a multi-year bull run any time soon. But, even if we do, it does not mean that you will not be buying MF through this method. You need to understand that in a bull run too, there are often corrections and some of them are rather deep. In such situations the 50 DMA and 30 DMA will keep declining and you can buy when the difference between these and market levels is minimal. Of course if the correction is such that the current market level goes below the 30 DMA then it will be ideal.
The second issue is that you must fix a level at which you want to buy. However, this is not sacrosanct and you will evaluate the market situation before you actually buy. For example, I want to buy my large cap MF when Nifty reaches 7800. Now, if I see the Nifty falling rapidly due to some adverse sentiments related to the Fed rate hike in the US, I will obviously wait for a couple of days to see where things go. You always need to have an idea of a level at which you want to buy ( or sell ) in the markets but you decide on the actual transaction based on the ground situation.
The third issue is the availability of money to buy the required units at the right time. There are no easy answers to this but one simple way can be to have a slightly inflated Emergency fund. Of course, you must remember to replenish it as quickly as you can, preferably on the next pay day.
Now that we have addressed all these issues, let me give you an investment approach that I follow myself and recommend to others. You need to understand it completely and implement fully if you are interested, half measures will not do.
- 3 portfolios Debt, MF and Stocks are all you have.
- Decide on your overall annual investment and their break-up. For example you can say 3 lacs of Debt ( PF and PPF equally), 3 lacs of MF and 1 lac of stocks. This is just an example.
- In the starting months if you are not investing in MF due to market levels not being appropriate, invest in PPF or stocks.
- Once you run out of PPF amount of 1.5 lacs and stocks of 1 lac then keep the money in Liquid funds or just let it be in SB account.
At the end of the day you need to decide how you will invest for yourself. If you still think that standard SIP with the same amount being put on the same date every month, irrespective of the market levels is really the way you want to go about things, then you should do so. It is important to feel comfortable about what you do.
You just need to make sure that your comfort is not based on the fact that you do not know a better way – well, now you do.