Trying to time mutual fund investments? You could be in for a rude shock

NEW DELHI: If you are among those few investors who try to ‘time’ mutual fund investments, then a report prepared by global mutual fund advisory firm Morningstar could come as a rude shock to you.

The report says, in the 10-year period from March 2011 to February 2021, Indian stocks owed all their outperformance over cash to just eight months, or 6.7 per cent of all months. The same was even lower for mutual funds. On an average, actively managed diversified equity funds’ outperformance was attributable to an even smaller time period: 6 months or 5 per cent of all months.

To make it simpler, in 10 years, NAVs appreciated in just 6 months. If you sold your mutual fund investments in those six months or ahead of them, you wiped out all chances of creating wealth.

“Trying to find the best time to buy or sell a fund is most likely futile. Most of the time, even outperforming funds basically track or trail the index. 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,” said Kaustubh Belapurkar, Director – Manager Research, Morningstar India.

The analysis shows an obvious but important corollary 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,” said Belapurkar.

So what should you do?

Staying invested is the name of the game, say analysts. Actively managed funds are finding it increasingly harder to beat benchmarks. In addition, the number of months contributing to overall outperformance versus benchmarks of these funds is also shrinking. A report by S&P said 81 per cent of largecap fund managers failed to beat their respective benchmarks.

“Investors are best served to identify consistently managed funds and stay invested. Investing basis recent performance can be counterproductive, resulting in missing critical months of performance in both the newly invested funds as well as the exited funds,” said Belapurkar.