Timing Mutual Fund Investments
In today’s edition of DNA, Ritesh Jain, CIO of TATA Asset Management Ltd makes a case for investing in Mutual funds since returns from Real Estate going forward are going to be impacted owing to both a excess of supply and changes in government rules with regard to black money (Link). In a way, we agree with his view that forward returns from Real Estate may not be as interesting as it had been in the years gone by (specifically between 2005 – 2010).
But that does mean that investing in Mutual funds at any point of time is the best way forward. While we strongly believe that for most investors who cannot afford time and investment to analyze the markets on their own, the best path is by way of Mutual funds, there still lies the fact that even Mutual funds have big risks.
To buttress my case, lets look at one of the top Equity funds of Tata Mutual Funds – Tata Pure Equity Fund – Growth.
The scheme has been a steady compounder with CAGR returns sinec inception coming in at 20.19%. But that return has not come without some significant volatility. The fund has twice in the last 15 years seen a draw-down that exceeded 50%.
To give you a better picture, assume you invested into the fund in early March 2000 based on the exuberant markets you had heard about and how rather than risk in direct equity, Mutual funds were a better tool. Well, the next time you saw the fund NAV return back to your purchase price was in December 2003.
While I may have chosen the most extreme example, my point is that while Mutual funds are good investments, even there timing matters a lot. Invest in a wrong time (such as the early 2000 or late 2007), and no fund manager can provide you the cushion you so desperately wish.
As I wrote in an earlier post, some of the best performing funds saw big draw-downs in 2008 / 09 and in a way unless one really slept off during the period, the pain of the losses (even though they would be Notional) is too hard to ignore.
Prashanth , as you said , you picked the most extreme example and implictly assumed that the investor put in all his investible surplus at that point of time ( early 2000 or late 2007) .By that logic , he could have picked early 2003 or mid 2013 as well ?
But most investors are not like that, they do practise some sort of systematic investing plan , periodically replenishing their portfolios with savings from salaries or other sources , reducing the volatility of catching a high or low point. I have been investing in MFs since 2004 and never have been I able to successfully time the market and invest all my money at a market bottom. But I have also avoided investing all my money at a market top and gained a decent double digit CAGR ( >20%) over 10 years. That should be the experience for the vast majority of investors who invest systematically and do not attempt to time the market. I speak from my own life experiences 🙂
Very true Nishant. As to investors preferring SIP vs Lumpsum, I would really love to see some data in that regard.
Having said that, my point was that timing can make a tremendous difference in returns in any asset class (think about buying Real Estate in 2003).
Congrats on your returns and Good Luck for the future.
Of course , timing does make a huge difference..but isn’t the best time only available in hindsight ? While investing in 2008 , I was a relative newbie else I would have begged and borrowed as much money as I could and invested as much as possible in that twice-in-a-lifetime opportunity.
Afterwards, i read up a lot on PE ratios and dividend yields of the Nifty and how I could use it to time my investments.But did I make use of it in Dec 2011 or Aug 2013 .Both times , the Nifty PE and dividend yield told me it was not time to go all-in and so I continued with my regular SIPs. It is with the benefit of hindsight I can see August 2013 would have been a great time to put massive lumpsums in . But did I or anyone I know do it ? No. For the vast majority , investing systematicall and ignoring market noise turns out to be very beneficial.
As to investors preferring SIP vs Lumpsum , I just extrapolated from my own and my friends investing habits. Could be an extreme case of selection bias!!
A Vanguard study actually says “lump-sum investing achieves better returns than dollar-cost averaging”. Need to test for Indian funds to see if they are any different.
Thats a great study and I read it. In USA the Indices are effective and so passive investing in Index funds by timing can do well, In India its all stock specific. #manadi_rota
I always timed my MF investments. I bought in the lows of 2013 and sold in the highs of 2015 and made more than 100% on some schemes. It was pure timing. I never do SIP, as I treat MF’s just like top-down stocks