Buy low, sell high and repeat: Timing is taking root in mutual funds

Inverse correlation between net equity MF inflows, market performance

The post-pandemic trend in inflows into active equity mutual fund (MF) schemes shows a section of investors trying to time the market. The monthly net inflows in the past few years reveal an inverse correlation with market performance: net inflows go up during phases of market downturns and vice versa.

Take, for example, the December 2022–March 2023 period.

The National Stock Exchange’s Nifty50 had ended lower in three consecutive months (December through February) and could only post 0.32 per cent gains in March.

The monthly net inflows into active MF schemes averaged Rs 14,000 crore. By comparison, during the better market phases of 2022 (July–August) and October–November, the inflows averaged just Rs 6,600 crore.

“Domestic investors usually tend to be cautious as the market rises and hits all-time highs. The flows tend to weaken. Further, if there have been recent instances of markets falling from similar all-time highs, most investors tend to extrapolate this and delay their new investments, expecting a possible fall. During periods of market correction, the stability of systematic investment plan (SIP) flows and incremental lump sum flows (buy the dips) has led to higher inflows in recent years,” says Arun Kumar, vice-president and head-research, FundsIndia.

Senior industry executives say this is being practised by only a section of investors as inflows through SIPs have remained robust across market cycles.

“There is no homogeneity among investors. There are millions of investors who do SIPs in equity MFs. There are many who try to time the market. The smart investors are those who practise disciplined asset allocation. What you are seeing is an aggregate of SIP investors, market-timers, and asset allocators. The maturity shown by investors in accepting SIP is truly positive for the MF industry,” says Nilesh Shah, managing director, Kotak Mahindra Asset Management Company.

Since gross inflows through SIPs have remained unaffected by the market movement for two years, the timing of the market mostly happens via the lump-sum route.

However, this may not be the right strategy for investors, given the risk of getting the timing wrong or ending up staying out of the market for a long time and losing out on returns in search of a better entry point.

This is what happened in the 2020–2021 rally.

An ICICI Securities report in November 2022 highlighted how some MF investors got the timing wrong during the market recovery in 2020.

“While this approach of lower investment at higher levels has been rewarding, investors got it wrong during recovery in the years 2020 and 2021 as markets continued to rally while investors booked profits early into the recovery (sold off early since July 2020 while the Nifty50 continued to rally until the first major correction in February 2021),” the report had noted.

In a recent data call, the chief executive of the Association of Mutual Funds in India asked investors not to get swayed by the market and instead focus on their goals.  

“Investors must stay invested for the long term without getting swayed by market movements. Time spent in the market is more important than timing the market. Our campaigns also aim at raising awareness about goal-based investing and investing for the long term,” he said.

While this practise may have consequences for investors, it is a positive for fund managers. This is because it is easier for them to deploy higher sums during phases of corrections when the stocks are available at a better value.

This trend starkly contrasts those seen pre-Covid, when investors resorted to panic selling during corrections.