From THE HINDU group of publications
Sunday, June 03, 2001


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Timing is of essence in MFs too

Aarati Krishnan

TIMING is almost a bad word in the dictionary of investment gurus. Ask a fund manager if you should time your investments in his fund and he would most likely react with horror and extol the virtues of ``long-term'' investing. ``Trust your money to us and wait long enough and you will earn a handsome reward for your patience'', seems to be the refrain.

Several independent research studies, commissioned in the US, prove with hard numbers that an active trading strategy yields much lower returns than a passive buy and hold strategy, especially when it comes to mutual fund investing.

But ask Indian investors who put their money into equity funds in the 1990s, especially in the bull markets of 1992, 1994 or 1999, and they will have quite a different story to tell. These investors would have lost money even in some of the best performing funds, if they timed their initial investment badly.

Consider an investor who put money into the Kothari Pioneer Bluechip Fund in September 1994, at an NAV of Rs 19 per unit. If, after waiting patiently for four years, the investor decided to redeem his investment in January 1999, he would not have made much money because the NAV at this point in time was hovering at Rs 19 per unit (after a dividend of Rs 2).

However, had he waited just a few months more, until September 1999, he would have doubled his initial investment. Yet, the Bluechip Fund is one of the most consistent performers among equity-oriented funds and has a compounded annual return of 22 per cent over a seven-year period.

But if four years seems too short, consider the case of UTI's Mastergain 1992 unitholders. It is now a full nine years since the fund's launch. But its NAV hovers at just below Rs 10 per unit. Even after factoring in the two dividends paid by the fund, the fund has earned a measly 2 per cent annual return for the investors who patiently stuck to their investment through thick and thin. Whereas an investor who redeemed his Mastergain units in the bull market of February 2000 would have managed to salvage something out of his investment _ the NAV was then hovering at Rs 16 per unit.

These instances drive home the point that timing is a crucial element in determining how much money an investor makes from his mutual fund investment. Theoretically, timing should not matter too much while investing in a mutual fund. An astute fund manager can use a market rally to book profits and thus `lock' into higher returns for the fund. He can remain invested in cash if he apprehends a sharp tailspin in equities, thus protecting the NAV from a sharp tumble in the event of a market decline.

But as the experience over the past decade shows, fund managers are only human, and hence cannot be expected to foresee market reversals accurately. Given the immense competitive pressures under which fund managers function, it is very rare indeed to find one who will switch a substantial portion of his assets to cash in a bull market.

As an investor you might ask: If a professional fund manager cannot foresee market reversals correctly, how do you expect a lay investor to time his investment into a fund? True, as a lay investor your chances of entering a fund when it is at its absolute nadir, and exiting it when it is at its peak, is next to impossible.

But you can still safeguard your investment by avoiding the dangers of bad timing. You could use the market levels as a rough benchmark. You could avoid investing in a diversified fund when the Sensex has just appreciated by 40 per cent over the past three months. You can avoid investing in a technology fund which has just doubled its NAV over a year. Similarly, you can avoid selling your fund, when the Sensex is hovering close to its 52-week low.

This is not to say to that investors should indulge in frenetic trading in their mutual funds, buying and selling every month or quarter. There is a risk of losing a large portion of the returns to transaction costs and to bad calls on the market. But timing your initial investment well and booking profits on your fund, once it exceeds your target return, may be the prudent way to make the best of your mutual fund investment.

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