Should you invest in index funds when the market is on a downswing? Experts speak
Stock markets have characteristically been volatile in the past few days. After delivering the best session of four years on Monday by rising 3.7 percent, Sensex dropped 1.6 percent on Tuesday.
In the last two sessions of the previous week, Indian markets lost $83 billion in market cap on the India Pakistan conflict following Operation Sindoor. This decline and rise followed by another fall has left retail investors spooked and gobsmacked.
Experts, therefore, recommend retail investors to contemplate passive investing. One way to follow passive investing is to invest in index mutual funds. For the uninitiated, index funds invest in those securities, which constitute popular indices such as Nifty50, Sensex30, Nifty100 -- that too in the same proportion as in these indices.
“Index funds track a specific market index, and historically, markets tend to recover after periods of decline. So, when you invest in an index fund, you can benefit when the market turns upwards. They also provide broad diversification across various sectors, themes, and stocks, so they help reduce the risk of concentrating investments in a few companies when the market is volatile,” says Preeti Zende, a Sebi-registered investment advisor.
Experts believe that investing in index funds when the market is down is a no brainer strategy for long term investing. “An index fund is a passive fund that replicates the performance of a specific market index. When there is a volatility and the future is uncertain due to various domestic and foreign issues, geopolitical scenarios in this case, retail investors normally get confused about the investment ideas, in this case, investing in a simple Nifty index can solve the confusion.” adds Zende.
Santosh Joseph, CEO of Germinate Investor Services argues that the investors should use the opportunity to invest during a downswing.
“While any market downswing presents an investment opportunity, it’s not always easy for investors to act on it. There's often a dilemma—what fund to choose, which category or sector, and which specific area to invest in. In contrast, index funds offer a broader and more participative opportunity,” he says.
“If you invest in an index fund, you at least benefit from the overall performance of the index. You may not get the best returns, but you’ll likely capture a significant portion of the gains,” he adds.
“Index funds provide a good option especially for investors who are just starting or looking for avenues wherein they are not really sure about Active funds. Whether to invest or not in the downswing depends on one's risk appetite and time horizon. They are just like any other equity funds, so one may allocate some part of their portfolio to them if it helps meet their financial goals,” says Siddharth Alok, AVP Investments, Epsilon Money.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before making any investment decisions.
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