Should you time Mutual Fund investments?  08/02/2020 18:11:35 

Many investors who invest in mutual funds (MFs) do so to leave it to the experts; to avoid trying to time the market, which can be like catching a falling knife sometimes. But few stick to this discipline for the rest of their investing lives.

Investors who start out well, with the intention of doing an SIP in a disciplined manner in an asset-allocated portfolio, get this urge to start timing the market, start timing SIP, start dynamically shifting between asset classes and start booking profit often.

And, if they get hurt in the process, they ask for a product/scheme that will effectively time the market or dynamically manage it. Here are some queries that are most often asked and strategies that are sought but best avoided.

Timing SIPs

The idea of an SIP is not to get high returns; nor is it about timing the market. It is only about rupee-cost averaging. Yet, many want to stop SIPs when markets are at a peak and wait for the right time to deploy it at a low. And, what if markets remain elevated for a longer period? Nothing happens other than your losing out your disciplined savings and not allowing the money to compound.

SIPs are simply meant to give you a regular savings vehicle to invest in. SIPs are not infallible, and can deliver negative returns. For example, a 5-year SIP in the Nifty 50 would have given a negative 8% IRR (internal rate of return) in the March 2020 lows. Had you held it for another 4 months, it would have bounced back to 6% IRR. That is the nature of the market. SIPs cant skip it.

An AMC did a study by taking the 1990-2019 period and calculated monthly SIPs on the Sensex on the worst days of each month (where you think you are averaging better) and also on the best days (where you think it is too expensive).

The return differential was less than 30 basis points on an annualised basis (IRR). This was to drive home the point that trying to time SIPs isnt really going to significantly change your fortunes. If any, you will only disrupt your savings habit.

There are two simple ways to tackle the market volatility instead of trying to time the market: one is to have asset diversification and two, rebalance; that is, periodically shift from the asset class that has swelled (from your original allocation) to the one that is deflated in your own portfolio. This needs no market timing. Just a periodic review of your own portfolio would do.

At best, when there are deep market falls, you can always add more to your investments. But remember, you need deep pockets for this. For averaging to be meaningful, on top of your existing investments, you need to deploy funds substantially. Otherwise, at best, it gives you some psychological satisfaction.

Managing asset allocation

Some investors have asked us for price earnings ratio (PE) ranges to deploy into equity or to exit. It is indeed true that had you invested at lower PEs, you would have gained. But what if you stayed away from markets too long because valuations are high? Even fund managers who took such cash calls have burnt their fingers. Let me explain some of the limitations of this strategy if you try to do this based on a playbook.

Markets can remain expensive for prolonged periods, sometimes. For example, the Nifty 50 PE was over 20 times almost at all times in 2015, although the historical average has been 18-19 times. In such periods of steady, high valuations, your PE-based investing model will likely keep you entirely away from equity or invest less.

This may impact your corpus creation as you will not be investing steadily towards your goals. Any dip in PEs, as happened in March 2020, is often so short-lived that an investor who has stayed away too long seldom has the courage to deploy everything in one go and hence, deploys too little to meaningfully buy at lows. Again, simple acts of annually rebalancing asset allocation should do the job, rather than trying to disrupt your portfolio too often. You can still use PE signals to deploy additional sums.

Selling when expensive

Many of you are happy with the returns in some of your funds and when the market also looks bullish, you want to sell the high-returning fund and go for a lower returning (or lower NAV) fund or an NFO. Why? Because you think the fund valuation has turned expensive. Funds are not stocks. They only hold stocks. And they can exit a stock and buy better ones if a stock turns expensive or is underperforming. If a fund returns high, it is true that it may not be able to replicate such performance yet again. But to sell it in favour of a lower returning fund (which may be simply an underperformer) or to go for an NFO, which has no track record, cannot possibly provide you cheaper alternatives.

So, in essence, MFs, unlike stocks, are not buy low, sell high instruments. They are buy when you have money, sell when you need money instruments. Understanding this basic truth will serve you well.

(The author is co-founder,

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