An investor should always have a clear vision when deciding to diversify his or her portfolio. It is crucial always to keep your mutual fund’s portfolio investment aligned with your financial (long-term/short-term) objectives. Though any financial expert will always suggest that any time is a good time to invest in index mutual funds, retail investors should be aware of certain market conditions before trying their hand at this unique investment option. Especially for a long-term investor, index funds are all-time favorite investment options because they give them an upper hand over their counterpart investment options, i.e., active funds.
But there are times when prevailing market conditions make buying index mutual funds a far smarter option to buy over other types of active funds.
So when exactly do I invest in index funds?
Every investor should keep in mind that fund managers or financial experts can’t really predict what the future market conditions are going to be. They can only make an educated guess. There isn’t any full-proof algorithm that can help investors foresee how the market will perform in the coming quarter or month, for that matter. Thus, no fund manager can predict exactly which mutual fund will perform well or whether any current well-performing mutual fund will sustain its positive run for a longer time period.
When are markets rising?
Having said that, there are times when stock prices become exorbitant across all markets. This could result in active funds becoming unsuccessful in making profits as fund managers’ expertise in buying and selling stocks strategically could become less effective. Their chances of beating market indices may come down. This is one of the times when investing in index funds is a relevant option because of their ability to mimic market indices’ performance instead of individual funds.
When are markets falling?
Similarly, there could be events that could result in the stock market to fall for some time. Buying when the market is low is a time tested method to make good gains. But which stock to buy in such a situation? What if the market goes down further? The answer lies in an Index fund. This will diversify your risk, and when the market goes up, you will reap the benefits.
Moreover, an index fund has a lower fee compared to an actively managed fund. This means that less of your money goes towards fund management, irrespective of whether the market is gaining or losing. The bottom line is that you cannot predict how the market will perform in the coming six months or the next few years. Index funds can be an intelligent investment choice for diversification and can be used wisely to construct a stronger long-term portfolio in conjunction with actively managed funds.