Mutual Fund Strategy: Finding Best Time vs Staying Invested – Research Reveals What May Work Better

Tyring 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, according to research by Morningstar.

“We have spoken for a long time about the benefits of long-term investing in a volatile asset class like equities, and what really matters is ‘time in the market’ rather than ‘timing the market.’ Over the long haul, the stock market’s outperformance over cash boils down to just a few critical months. Miss those months and you will have missed all the risk premium to be earned from holding a volatile asset such as equities,” say authors of the research – Kaustubh Belapurkar, CFA and Director, Manager Research and Melvyn Santarita Analyst, Manager Research at Morninstar.

The study found that between October 2013 and September 2023, Indian stocks owed their outperformance over cash to just 12 months — 10% of the months in the sample.

“If you held stocks for all 108 months apart from those 12 months, which we will call “critical months,” a term which we will define more precisely later, you would not have beaten cash,” the researchers say.

Further, on average, less than 4.2% of the months account for all of the outperformance for Indian actively managed diversified equity funds versus their benchmark.

“Active management turns out to follow the same dynamic as the market as a whole. It is thus natural that the implications for buying and selling actively managed funds should be similar to those regarding timing entire markets,” the researchers say.

Also Read: Best portfolio combination? 50% Equity: 50% Debt shows low probability of negative returns – Study

A previous version of the research published in April 2022 shows that over a 10-year period (April 2012 to March 2022), Indian stocks owed all their outperformance over cash to just 11 months, or 9.2% of all months. Similar numbers were witnessed for actively managed funds, where, on average, just six months, or 5% of all months, accounted for their outperformance versus their benchmarks.

Interestingly, this is not just an Indian phenomenon. A global study released by Morningstar in 2019 revealed similar trends
for U.S. large-cap stocks for investments since 1926, where 5% of the months attributed to the overall outperformance over cash. Similarly, the global study of outperformance for the last 15 years found that 5% of months account for the outperformance of actively managed funds globally.

In the 10-year period from October 2013 to September 2023, there were slightly better results for the overall markets: Indian stocks owed all their outperformance over cash to just 12 months, or 10% of all months.

The researchers performed the same test against Indian actively managed diversified equity funds for a 10-year period from October 2013 to September 2023 to determine if the phenomenon applied to them as well.

They found that on an average, Indian actively managed diversified equity funds’ outperformance continued to be attributable to a smaller proportion of months: five months, or 4.2% of all months, which is lower than the 2022 study of six months, or 5% of all months. However, this number varies across categories.

What should investors do?

Explaining the implication of the finding of the study, the researchers say that investors should not try to time investments in actively managed funds.

“Staying invested is the name of the game. 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 shrinking,” the researchers say.

Investors may be best served by identifying consistently managed funds and by staying invested.

Investing based on recent performance can be counterproductive, resulting in missing critical months of performance in both the newly invested fund(s) as well as the exited fund(s).

“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 the most important corollary, is that a fair amount of patience is required to adhere to such a program,” the researchers say.

“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,” they add.

Disclaimer: The above content is for informational purposes only, based on the report of a resaerch by Morningstar. Readers are advised to consult their financial advisors before investing in any mutual fund scheme or market-linked instrument.