‘Trying to time buy and sell decision in actively-managed funds is futile’

Trying to find the best time to buy or sell an actively-managed fund is most likely futile. Most of the time, even outperforming funds basically track or trail the index, reveals a report by Morningstar India. The report points out that over a 10-year period, actively managed mutual funds owed all their outperformance over benchmark to just 8 months, or 6.7% of all months accounted for investment.

On an average Indian actively-managed diversified equity funds’ outperformance was attributable to a smaller proportion of months: 6 months or 5% of all months, which is lower than the number from the 2019 study done by Morningstar India.

“If you think you have identified a skilled manager, the best course of action is to buy in or rupee-cost average, regardless of the moment, and hold on to the fund over long periods of time. The obvious, and perhaps even more important, corollary is that a fair amount of patience is required to adhere to such a program. A good manager may take a long time before critical months materialize. Thus, don’t sell based on the “what have you done for me lately” rationale. The gospel of wisdom can be adapted to active management: No one knows the day or the hour when outperformance will strike,” says Kaustubh Belapurkar, Director – Manager Research, Morningstar India.

The report also says that in addition the number of months contributing to overall outperformance versus benchmarks of these funds is shrinking. Simply put, investors might be better off if they identify consistently-managed funds and stay invested. Investing on the basis of recent performance can be counterproductive, resulting in missing of critical months of performance in both the newly invested funds as well as the existing funds.