Last year, inflows into equity markets continued despite a correction, due to optimistic expectations and sentiment. This tapered off only after January 2016 as one- and two-year returns turned negative. Earlier as well, inflows into equity markets were high closer to market peaks. According to data from the Association of Mutual Funds of India (Amfi), the highest ever monthly inflows into equity mutual funds was in January 2008, a period when the equity market touched an all time high till then.
Even though trying to time an entry or exit in a market is common investor behaviour, historical data shows this doesn’t yield much for a long-term investor.
How do we know this? We took a look at rolling returns for two indices: Nifty 50, a domestic large-cap index, and Nifty 500, a broader index. Rolling returns are a return series for any specified frequency taken regularly for overlapping cycles to account for the fact that investors enter and exit at all times. Nifty50 is a relatively focused index as it has 50 stocks, while the latter has 500 stocks. However, data shows that both have something in common—the longer you invest for, the less volatile your return will be, and hence, the less valuable a market timing strategy.
What is market timing?
Domestic equity markets haven’t done well after the peak of January-March 2015. Until before the Budget session in 2016, experts were talking about more downside, but the mood has changed now with monsoons expected to be on track, industrial production numbers being good and global sentiment positive. If you were waiting for markets to fall further before starting to invest, you were timing the market. Alternatively, it could be that you are new to equity, and as the market picks up, say, a year into the rally, you speak to friends and acquaintances and realise that they are making a good return. You too want a piece of the pie and jump in. Again, you would be timing the market.
