Is there a ‘good’ time to buy or sell actively managed funds?

By Kaustubh Belapurkar |  10-04-21 | 
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About the Author
Kaustubh Belapurkar, Director of Manager Research, Morningstar Investment Adviser India.

Just like timing the market is difficult, timing the entry and exit in equity mutual funds is a futile exercise. This is corroborated by our latest study which analysed actively managed equity diversified funds over ten years.

We first looked at the Indian stocks’ outperformance data over a ten-year period. From March 2011 to February 2021, Indian stocks owed all their outperformance over cash to just eight months or 6.7% of all months.

We performed the same test against Indian actively managed diversified equity funds for a similar period to determine if the phenomenon applied to them as well. We found that 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 results show that on an average Indian actively managed diversified equity funds' outperformance was attributable to a smaller proportion of months: six months or 5% of all months. 


The table below displays aggregate statistics for critical months (Critical months are those months whose removal from the return series would eliminate the fund's outperformance over its benchmark.) first in aggregate and then grouped by fund category.

One can immediately see that whether it's mean, median, or the top- and bottom quartile breakdowns, these numbers are small and should give little comfort to investors who try to find the best times to buy and sell actively managed funds. In aggregate, the median number of critical months was five. That means that half of the funds' outperformance was due to five or fewer months. One in four funds (25th percentile) owed their outperformance to three or fewer months. Finally, three fourths (75th percentile) of all the funds' outperformance was attributable to nine or fewer months. Mid Cap Funds were the best of the pack, while expectedly funds with a Large Cap bias came in with the poorest results.

Average no of critical months by category

What should you do?

  • Investors should not try to time investments in actively managed funds. Staying invested is the name of the game.
  • Investors are best served to identify consistently managed funds and stay invested. Investing basis recent performance can be counterproductive, resulting in missing of critical months of performance in both the newly invested funds as well as the exited funds.
  • The most practical implication of our findings—is that trying 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.
  • 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 more important, corollary is that a fair amount of patience is required to adhere to such a program. 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.

(Only equity funds regular share class (ELSS, Large Cap, Multi Cap (Flexi Cap) & Mid Cap) were considered for this study.)

Download the full report here.

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Pradeep Pappachen
Apr 12 2021 11:18 PM
 Agree with Mr. Ninan, will add what india lacks is target date funds that is run by Vanguard for retirment that draws down its riskier components to supposedly more safer bets with time.
The problem with most AMC's in India is everyone is in there for the money hence bundling indices and selling them will be lower on priority.
If an AMC is listening please launch these target date funds on a roll down maturity every year. This will also help individual investors apply a lockbox principle on a yearly basis for their outgo.
ninan joseph
Apr 10 2021 06:42 PM
 The very purpose of investment is to generate returns and to use it as and when need the money. If this is the core objective where is the question of timing the markets? We should remain invested and we should redeem when we need the money. This is easier said than done. Why, because there are too many moving parts.
1. The purpose of investing through MF is to get diversification and get professional advice. However in reality what we get is sheer underperformance, no justification for underperformance but take commission what may. As the very nature of MF is too many investors, nobody bothers to make inquiries as to why there was an underperformance. I wonder how many AMC do a review of their portfolio and advise the clients the reason for their underperformance. The only reason cited is market. No one can counter this. No AMC says they used these strategies but still underperformed. There is no accountability as the investors are large in number. Never heard that the fund manager was moved or shifted due to underperformance.
2. News media and websites have now put the onus on investors be like a hawk to see where the money is invested. Need to know the pedigree of the manager managing the fund. Need to check his horoscope as if I am getting my daughter married to him. Pray daily that this guy does not leave the fund house.
3. The investors then has to worry about the AMC integrity, like we experienced in FT.

In my humble opinion, go and invest in stocks directly. If you lose at least it was your decision.

It is stupidity to enter and get out of MFs so where is the question of timing? You do it on stocks. Follow the simple rule, invest in Nifty ETF. At least you know you have invested in top 50 companies of india. Keep this for long and your investment will only increase over the years and as and when you need money, redeem the units like you take out money from sb account
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