Market Crash! Should You Invest In Mutual Funds or Fixed Deposits?
While many investors get excited when the market crashes, looking to close a better deal on mutual funds that have become cheaper, there is need to be careful when it comes to deciding on the next step.
Let’s Understand What Happens When the Market Crashes:
Mutual Funds: When the market crashes, the prices of equity stocks fall. With this fall, the NAV [Net Asset Value] of mutual funds also fall. Depending on which sectors are most hit in the market crash, the mutual funds invested in those sectors will see a higher decline in their NAV.
Fixed Deposits: There is no change in the interest or tenure of the Fixed Deposit (FD) investment as those are locked with the bank and have no association with the fluctuating equity markets.
As a New Investor What You Need to Know Before Making An Investment Decision After a Market Crash:
The best way to understand how well a mutual fund is performing is to analyse its past record and compare the same with its peers. Once the analysis is complete, check to see whether the expense ratio is low and ensure there are no exit loads. Keep in mind that mutual funds that lose the most value are not destined to be the greatest rebounders as the market recovers. Also study the mutual funds that may not have taken the most beating in a market crash, as these mutual funds may be able to absorb future market shocks with ease while growing well in between market crashes.
If you have already invested in mutual funds and are looking to increase your exposure in the market by investing more in the same mutual funds, you need to consider the past NAV of the selected mutual fund. Is the present average NAV lower than the 3-year average? If the present NAV is lower than the 3-year average it could be argued that the fund is undervalued. Next, it is prudent to check whether the fall in NAV is only because of the market crash or whether the mutual fund has been consistently falling. In case of a consistently falling NAV, the investment may not be the best bet. While all these are merely security measures, there is no sure shot way to ensure that the NAV of the chosen mutual fund will increase after a market crash.
The best bet against such market inconsistencies, while securing a safe return with low risks for your investments would be an SIP (Systematic Investment Plan). Choosing an SIP gives you the advantage of investing a small amount on a weekly or monthly basis. This allows you to buy more units as the NAV of the mutual fund decreases. This will yield higher returns when the NAV increases. When the NAV is at a high, the investor will be able to purchase fewer units, but in the long run the returns will compensate for the purchase loss.
Investing in a fixed deposit is a safe option even after a market crash as there is no change in the returns offered, and at the same time the investment is secure. This is mainly because of the fact that fixed deposits and their interest rates are not affected by the day-to-day volatility of the market, its stocks and shares. However, the investor may miss the opportunity to make a higher return by being part of the erratic market.
Additional Read : How is fixed Deposit better than any other Investment?
To conclude, for a low risk investor fixed deposits may be the right investment after a market crash, and for an investor with a greater risk appetite, mutual funds may yield higher returns after a market crash. With many investment options spanning fixed deposit and mutual fund investments at competitive interest rates and easy documentation and set-up processes, Bajaj Finserv may be an option worth looking at. To know more about these click here: