A Diwali guide to mutual fund investments

As the festival of lights draws near and diyas begin flickering in Indian homes, many of us may also feel a pull toward new beginnings, new goals, new hopes, and new financial plans. And if this Diwali, you find yourself thinking: “Can I start investing now?”, there’s some good news mutual funds may offer a flexible way for you to begin or expand your investments. In this guide, we’ll discuss how you can lay the foundation for potential financial growth this Diwali.

Table of contents

• Why choose mutual funds this Diwali?
• Disciplined investing via SIPs
• SIPs may be especially suitable when you:
• When a lumpsum may be suitable
• Market opportunities around Diwali
• Steps to begin investing in mutual funds this Diwali
• Common mistakes to avoid when investing during Diwali

Why choose mutual funds this Diwali?

Mutual funds offer access to diversified portfolios managed by professionals, which may be more convenient than picking individual stocks. Even with a relatively small sum, you gain exposure to equities, debt, or a mix of assets through mutual funds.

Disciplined investing via SIPs

An SIP (Systematic Investment Plan) is the practice of investing a fixed sum at regular intervals (typically monthly). Over time, an SIP helps average out your purchase cost through rupee cost averaging. Even when the markets are volatile, SIPs spread your entry points rather than depending on timing the market.

Also Read: How To Choose a Mutual Fund For Financial Goal

SIPs may be especially suitable when you:

• Lack a large one-time surplus but have a steady income.
• Want to avoid trying to time market highs and lows.
• Aim for long-term goals (5 years or more).
• Want to make investing a disciplined habit.

When a lumpsum may be suitable

Lumpsum investment means putting a larger amount at once rather than spreading it out. This might potentially help you when markets are at favourable valuations (if you have a surplus and market knowledge). However, it has a higher timing risk. If markets fall after your lumpsum entry, short-term outcomes may be unfavourable. Therefore, many investors prefer long-term SIP because it mitigates timing risk. In essence, the “SIP vs lumpsum” debate doesn’t have a universal winner––context, income flow and market conditions matter.

A reasonable approach may be to deploy part of your Diwali bonus or surplus in lumpsum (if valuations seem reasonable) and channel the rest via SIP to stay balanced.

Market opportunities around Diwali

Historically, “Diwali muhurat trading” in stock markets is seen as a symbolic start for the new cycle. While retail enthusiasm peaks, institutional participation also tends to increase. Yet, stock market timing remains unpredictable. Patterns observed in prior years may not necessarily repeat. Instead of chasing a “Diwali bounce”, it may be advisable to use this period to reassess allocations, top up existing funds, or begin new ones.

Steps to begin investing in mutual funds this Diwali

Here is a possible approach when it comes to investing in mutual funds:

• Establish clear financial objectives: Define the reason you are investing, i.e., children's education, purchasing a house, retirement, or a sabbatical fund. Forecast amounts and time frames: short-term (1 to 3 years), medium-term (3 to 7 years), long-term (7+ years).
• Assess your risk tolerance: Ask yourself, how much volatility can you tolerate? If you have low tolerance for potential losses, debt-oriented schemes may be suitable. If you can handle some short-term volatility for potential long-term gains, equity funds might be suitable. If you want greater balance between risk and potential reward, you may consider hybrid funds. Life stage, income and outstanding financial obligations may also impact your risk appetite.
• Select a suitable mutual fund for you (equity, debt, hybrid):
  • Equity funds: invest ≥ 65% in equities. Suitable for a long-term horizon and investors with a high risk tolerance.
  • Debt funds: Invest chiefly in fixed income instruments. They are relatively less volatile but also offer lower potential returns).
  • Hybrid funds: a combination of equity and debt. Depending on the fund's exposure to equity (e.g., 35% to 65%), its classification for tax purposes and risk assessment may vary.
• When choosing, consider:
  • Expense ratio (lower expenses mean higher net potential returns).
  • Consistency (look at multi-period performance*).
  • Tax implications

Past performance may or may not be sustained in future

Common mistakes to avoid when investing during Diwali

Here are some common mistakes that investors may make when investing:

• Timing the market: Trying to catch the top or bottom may often lead to unfavourable outcomes. Stick to regular investing (SIP) or deploy lumpsum only when you are comfortable.
• Ignoring mutual fund fees: High expense ratios and charges can erode potential returns over years.
• Emotional decision-making: Festival enthusiasm, media hype, or peer pressure may push you toward impulsive investing. It is advised to slow down, revisit your goals, and not let the fear of missing out dominate your decisions.
• Lack of diversification: Putting everything in one fund, sector, or theme may be risky. It is recommended to spread investments across equity and debt assets depending on your goals and risk tolerance.

Also Read: What are the benefits of investing in mutual funds?

Conclusion

This Diwali, along with lighting diyas, also consider potentially lighting the path towards your financial future. Mutual funds, via SIPs or lumpsum, may offer a route to disciplined, goal-oriented investing. But aiming to time the market might not be advisable; instead it might help to focus on consistency, costs, diversification, and alignment with your objectives. With patience and clarity, your investments may yield potential rewards in the long run.

FAQs

What are the benefits of starting mutual fund investments during Diwali?

Although there are no specific Diwali investment benefits, Diwali often corresponds to bonus season and renewed focus on goals. Starting then may help you build momentum.

Should I use an SIP or go for a lumpsum investment during festive periods?

SIP reduces timing risk by averaging cost over time. Lumpsum might be suitable if valuations appear favourable and you have surplus cash, but it carries higher short-term risk. Hence, combining both may help you strike a suitable balance.

How can I decide the right risk level (equity vs debt vs hybrid) for my investment?

Gauge your time horizon, income stability, and emotional reaction to market volatility. If the horizon is long and you can stay calm during dips, equity might be suitable. For shorter horizons or lower risk tolerance, debt or conservative hybrid funds may be considered.

What should I look for when choosing mutual funds (fees, returns, consistency)?

It is advised to check the expense ratio, multi-period returns (3, 5, 7 years), fund house reputation, and how the fund performed in different market phases. But do note that performance may or may not be sustained in future.

Can emotional excitement during festive times lead to bad investment decisions?

Yes. Impulsive investing driven by hype, fear of missing out, or peer influence may lead to bad investment decisions. It’s advised to focus on your goals and strategy.

How important is diversification in a mutual fund portfolio?

Diversifying across asset classes (equity, debt), sectors, and fund types can help reduce the impact of underperformance in one area.

What are the common traps investors fall into around Diwali investing?

Chasing market trends, overexposure to equity, neglecting fees, and letting short-term market movements derail long-term goals may be some common investor traps.

How long should I stay invested to truly benefit from mutual funds started during Diwali?

Typically, 5 to 7 years or more for equity funds is considered a suitable horizon. Shorter periods may expose you to higher market volatility, which may result in potential losses.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed.The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.