Should You Invest in Mutual Funds When the Market Is Down?

Investing in mutual funds has become one of the most popular wealth-building strategies in India. However, when markets decline, many investors hesitate and wonder, "Is it good to invest in mutual funds now?" or "Why are mutual funds down?".

And, to help you with these confusions, today in this blog we give you the answers of all your queries.

Why Are Mutual Funds Down?

Here are some key reasons why Indian mutual funds experienced a downturn:

• Stock Market Volatility : Most equity mutual funds are linked to the Sensex and the Nifty 50. Whenever these indices have faced corrections on account of global uncertainties, below-par corporate earnings, or economic downturns, the NAVs of the mutuals have taken a hit.

• RBI's Monetary Policy & Interest Rates : The Reserve Bank of India (RBI) is an important integral part of almost all movements in the market. Whenever it raises the rates to curb inflation, it affects debt mutual funds and the equity prices as a higher cost of borrowing is put on the corporations which in turn weakens their stock prices.

• Global Factors Affecting Indian Markets : The policies of the US Federal Reserve tend to affect FIIs, causing capital to flow out. The geopolitical tensions affect Indian markets regarding crude oil prices.

• Sector-Specific Slowdowns : Some sectors, be it IT, banking, or real estate, face downtimes due to regulatory changes or economic cycles which put pressure on the sectoral mutual funds.

Is It Good to Invest in Mutual Funds Now?

If you're asking, "Is it good to invest in mutual funds now?", the answer depends on your investment horizon and risk appetite. However, market downturns often provide an excellent opportunity to invest for the long term. Here’s why:

• Lower NAV Means More Units : When the markets are in the dumps, the mutual fund NAVs are also low, enabling you to buy more units at the same investment. As the markets recover, the amount of your investment will substantially grow.

• Rupee Cost Averaging with SIPs : Systematic Investment Plans (SIPs) are the best way to counter market volatility. When the shares' prices fall, your SIP buys more units, and when they ascend, your investment appreciates.

• Long-Term Market Recovery : Indian markets have, in the past, always mounted a strong and convincing comeback after every significant downturn: 2008 Financial Crisis – the Sensex fell to ~8,000 but later crossed 40,000. COVID-19 Crash (2020) – the Nifty fell to 7,500 and crossed 18,000 in two years.

• Opportunity to Invest in High-Quality Funds : Market downturns provide investors the opportunity to buy blue-chip equity funds and undervalued mid-cap and small-cap funds at discounted prices, thereby providing great returns when markets stabilize.

Best Time to Invest in Mutual Funds in India

Many investors wonder, "When is the best time to invest in mutual funds?". While timing the market is difficult, here are some ideal scenarios to invest in:

• During Market Corrections : When the Sensex of Nifty falls by 10-20%, it can be a great time to buy equity mutual funds at a lower price. Historical trends show that investing during corrections leads to higher long-term gains.

• When Interest Rates Peak : Debt mutual funds, especially long-duration bond funds, perform well when interest rates start declining. However, when the RBI raises interest rates, short-duration or floating-rate funds tend to be a safer and more profitable choice.

• Through SIPs in All Market Conditions : SIPs ensure you invest consistently without worrying about market movements. They provide the benefit of rupee cost averaging, which reduces risk over time.

• Before Financial Goals Approach : If you’re investing for retirement, children’s education, or buying a house, the earlier you start, the better your wealth accumulation will be.

How to Invest in Mutual Funds When the Market Is Down?

1. Select the Proper Category of Mutual Funds : According to one's risk tolerance, one may invest in:- Equity Mutual Funds: Suitable for long-term investments (5+ years), aimed at maximizing wealth.- Debt Mutual Funds: Ideal for stable, low-risk returns.Hybrid Funds: Combine equity and debt for balanced growth.

2. Diversify Your Portfolio : Do not invest only in one type of fund. Balance your investment across large-cap, mid-cap, and sectoral funds. Index funds can also be included for stable long-term growth.

3. Invest with a Long-Term Vision : Markets go through short-lived corrections. Stay invested to create wealth and avoid panic selling. Keep your long-term financial goals in mind.

4. Monitoring and Rebalancing Your Portfolio : Review your portfolio every 6–12 months to ensure it aligns with your risk profile and investment goals. Reassign funds based on market dynamics and personal circumstances.

Tax Benefits of Mutual Fund Investments in India

Investing in mutual funds can also provide tax advantages:

• ELSS Funds : Offers tax benefits under Section 80C (up to ₹1.5 lakh deduction). Has a 3-year lock-in period and high return potential. .

• LTCG Tax on Equity Funds : Gains above ₹1 lakh per year are taxed at 10% (without indexation).

• Debt Mutual Fund Taxation (2023 Update) : Short-term & long-term gains are both taxed as per the investor’s income tax slab (no indexation benefit).

Final Verdict: Should You Invest in Mutual Funds During a Market Downturn?

Yes. But only if:

• You have a long-term perspective.

• You invest consistently through SIPs.

• You select high-quality mutual funds.

• Avoid panic and stay invested during downturns.

Let's consider an example, for Mr. M, who started investing in the Indian stock market in 2001 with ₹10,000. Assuming he stayed fully invested, his investment would have grown at an annual rate of 15.61%, reaching ₹3,25,004 by 2025.

However, if Mr. M tried to time the market and missed just a few of the best-performing days, his returns would have been significantly impacted:

This example highlights how staying invested for the long term can significantly impact wealth creation, while attempting to time the market can lead to drastically reduced returns.

How Zactor Tech Can Help

Zactor Tech can be your financial guide and provide you with a clear investment strategy. You will receive a personalised investment plan based on your financial aspirations. Just enter your investment goal and timeline, and Zactor will show you:

• Where to invest.

• How much to invest?

• For how many years?

• Should you stay invested in a fund or withdraw your investment?

• What will be your expected returns with a SIP calculator?

Conclusion

The Indian stock market has historically bounced back, and those investors who did their homework and capitalized on a market correction usually made a larger profit than others in later years. So, instead of fearing a market downturn, use it as a chance to build wealth!

Contact a SEBI-registered financial advisor to get guidance if confused about fund selection. Happy investing!