As of May 2021, the markets might be looking attractive due to renewed optimism concerning falling Coronavirus cases and earnings upgrade from Indian companies. On the other hand, several rating agencies have downgraded India’s GDP forecast and outflows from Foreign portfolio investors amounted to $1.5 billion in April 2021. How do you respond during such market uncertainty? Do you try to book profits when the market is high or do you buy and hold? An ideal investing strategy is one where you can invest in a bear market and redeem when it is bullish. However, this is easier said than done. We evaluate the three reasons why market timing can best be avoided:
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Requires minute attention to monitor investments:
If you follow the financial market on a daily or weekly basis, it can be quite difficult to manage along with your personal and professional commitments. -
Consistency of making a right guess is not easy:
It is difficult to predict the market. Most big market gains and losses could be concentrated in short periods, wherein an untimely exit could ruin your long-term returns. -
Could be detrimental to your long-term goals:
We all know that market movement are mostly unpredictable in the short run. The risk of downside could be offset in the long run. Check the table below to see how the returns tend to be more attractive with time.
Table 1: Market volatility in 1 month, 3-month, 1 year and 5 year period
Past performance may or may not be sustained in the future.
Data as on April 30, 2021.
Returns are net of total expense and are calculated on the basis of Compounded Annualized Growth Rate (CAGR).
Source: BSE Sensex, Nifty 50 Index and S&P BSE 200 TRI.
So what could be your approach to market uncertainty?
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Assess your risk appetite: if you are risk-averse and unable to bear huge fluctuations in your equity portfolio, then consider allocating less proportion of your investable funds into equity mutual funds and a greater chunk of your portfolio in debt.
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Determine your investment duration: Consider your investment duration. A time horizon of less than 3-5 years can be considered as a short-term goal, whereas anything above 5-7 years can be considered medium- to long-term goals. This clear demarcation of your investible corpus can keep you from redeeming from your long-term investments to meet short-term expenses.
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Devise an asset allocation plan and rebalance periodically
Since financial assets such as equity, debt and gold are cyclical, predicting the next best asset might be a futile exercise. If you see in the table as illustrated below, investing heavily in one asset class has potential downside risks (see maximum drawdown). In such a scenario, it makes sense to devise an asset allocation plan with due weightage given to all assets, thereby reducing your downside risk. You could then periodically reassess your asset allocation strategy and bring the assets to their original intended allocation. For a simple and easy approach to asset allocation, it is suggested to first set aside 6-24 months of monthly expenses as ‘safe money’ in a liquid fund to act as your emergency fund and the balance of your money in Equity and Gold in the 80:20 ratio.
The illustration below uses the 40-20-20 allocation to Equity, Debt & Gold.
Table 2: Asset allocation delivers a better risk-adjusted return
The Time frame is November 2004 to April 2021. The period is taken from 2004 since the asset allocation weights are calculated based on normalizing the historical monthly equity and debt indicators. Given the normalization time frame used in the strategy, data availability for certain parameters beyond the time frame analyzed was a constraint. Compiled by Quantum AMC. *Equity-Debt-Gold ratio is 40-40-20.
Source: Sensex TRI, Crisil Composite Bond fund index, and Domestic Gold Prices
Past performance may or may not be sustained in the future
- Start an SIP to take the rupee cost averaging benefit
An SIP (Systematic Investment Plan) is one of the better routes to average your cost of mutual fund investments over the long term. As seen in the table below, SIPs allow you to buy more units when markets are low and lesser when markets are rising. This makes your investments more cost-efficient and negates the need to time the market.
Table 3: Rupee cost averaging benefit
The above table is for illustration purposes only. Investments through SIP is subject to market risk and do not assure a profit or returns or protection against a loss in downturn market.
The above table is for illustration purposes only. Investments through SIP is subject to market risk and do not assure a profit or returns or protection against a loss in downturn market.
Thus, in the end, it is not market timing, but a staggered investment approach coupled with a good asset allocation strategy in tandem with your risk profile and time duration at hand that can help achieve your financial goals.
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