Invest

Market-timing


Timing for Funds
Why Market-timing for Mutual Funds?
Equity mutual funds are a great way to build wealth. However, equity funds invest a lot in index stocks, in theme stocks, large companies with low earnings growth and are always fully invested no matter what is the valuation level of individual stocks and markets.

Since we have no control over how they invest, as investors, we have to be careful while using equity funds. While investing at higher market valuations we can get hit by both their a.) average stock selection and b.) 100% exposure to stocks.

Mutual funds are aware of this and openly state that it is for advisers and individual investors to decide when they want to invest and how much. Unfortunately, most distributors and advisers are not mindful of this, preferring the easy option of advising a monthly SIP. We do not take this easy route.

Our Approach
Anything that is traded, goes up and down. Anything that goes up and down, must be bought after they have fallen a lot and sold (or, at least not bought) when they have run up a lot. No wonder, study after study has shown that returns of any instrument that is market-linked, depends very significantly when they are bought. If you buy them high, you make less money, no money or losses, which may take years to recover. If you buy when they are low, you can achieve fabulous returns.

Here is a chart that describes it. These are returns across different five-year periods. Notice the wide variance in returns. And notice how higher five year returns have ALWAYS comes from a starting point when the index was low.

Low Valuation, High Returns


If the starting PE is high , subsequent returns are usually low. Conversely if the starting PE is low subsequent returns are high

NIFTY PE

5-YEAR GAIN


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Conversely, lower five-year returns have ALWAYS come from a starting point when the index was high. Can we use this knowledge to time our investments methodically?

Remember, when you use the word timing, most people assume you are talking of buying at the absolute lows and selling at the absolute peaks. This is impossible. In fact, it is not even needed. If you can approximately buy near the market lows, or refrain from buying when the market is too high or overvalued, your returns would be significantly enhanced.
Practical Application

We realise market-timing for mutual funds is not easy for the average investor. We have done thousands of hours of research on market-timing and put them all into a tool that that makes it easy to time your buying equity mutual funds. The tool tells you exactly how much to invest every month. When our tool senses that the market is getting overvalued, it starts reducing the amount to be invested, until when the market is grossly overvalued, the suggested investment goes down to zero. It does not suggest that you sell. In fact, the tool is not to be used to buy and sell. Here is our approach to asset allocation based on market-timing

1. Invest regularly in fixed income products and equity funds
2. When the market valuation is low allocate a lower investment in fixed income part and a higher investment in equity funds
3. When the market valuation is high allocate a higher investment in fixed income part and lower investment in the equity funds
4. When the market valuation is low again, catch up with the previous periods of low equity investment by shifting part of the money already invested in fixed income into equity funds
5. When the market valuation is extremely high, sell your equity funds

Note: This applies to mutual funds because of their investment philosophy. Allocation to well-chosen stocks is less dependent on market valuation.

Market-timing does not work many times because they are not backed by research and consistent method. Our mutual fund tool is backed by these two features so that you get more out of equity mutual funds.
Timing for Stocks
We do not apply the market-timing approach when suggesting asset allocation with stocks for two reasons

1. When we select stocks we have already taken into account the quality of stocks (most are high growth non-index stocks) and also valuation (none of them are overexpensive). We have noticed that some of these stocks fall less in a market downturn and rise more in an market upturn. Conversely, some of our stocks may have fallen while the market has gone up. In other words, our portfolio is less correlated to market valuation than equity funds -- UNLESS the market becomes hugely overvalued.
2. We have a fixed number of stocks to invest in every stockletter. We also suggest investing equal amount in each stock. When we do not find good stocks to invest in at an attractive price we automatically reduce the number of stocks to be bought. This means that the rest of the allocation has to be in cash. This creates automatic market-timing for stocks. For instance, the Lion stockletter may have a maximum of 16 stocks on a fully-invested basis, allocating 6.66% to each. However, given the market condition, we may have a selection of 12, allocating 75%. This means, 25% is supposed to be in cash.

The stockletter returns have beaten the best mutual funds every year for since inception in 2012. Please see this link  
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