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Punting is not investing

Value Research

Helping you invest wisely since 1990. The trusted source of mutual fund and stock insights.

发布日期: 2024年6月13日

Trying to catch the bottom of a falling market is tempting for mutual fund investors, but it is often a fool's errand

On the equity markets, every day is a contest between buyers and sellers, but rarely does this fight become as one-sided as it was on June 4 this year, with the major indexes down by 9 per cent at one point. Like any such day, there was a stampede of people trying to sell and run. However, some paid more attention to what Nathan Rothschild, a 19th-century British financier, supposedly said, "The time to buy is when there's blood in the streets." Or perhaps they paid attention to Warren Buffett, who said it's wise for investors "to be fearful when others are greedy and to be greedy only when others are fearful."

Whatever the case, there were actually many investors who decided to buy at the low prices that the markets were offering. Even mutual fund investors decided to get into this bargain hunting and tried to put in their buy orders on online apps early enough to catch the day's low NAVs. However, by all accounts, there was some kind of glitch in the online fund investment system, and a lot of investors' orders were delayed. As a result, many investors, instead of getting June 4's NAV, got June 5's NAV, which was generally around 3 per cent higher for most equity funds.

Investing in mutual funds online is a multi-faceted digital ballet that involves the user's app, the bank, the clearing house, the BSE StAR system (generally), the mutual fund and its registrar. Presumably, on June 4, parts of this chain slowed down, and many investors could not invest on that day's NAV. It's also possible that this happens to some people every day, but it produces anger only on days like this--a huge fall on one day followed by a sharp recovery the very next day.

While the system should surely be made more robust, I must point out that mutual funds are not quite the appropriate instrument for this kind of rapid action trading. Surely, every mutual fund investor knows these are designed for long-term investing rather than trying to time the market. Systematic buying and a buy-and-hold strategy of staying invested through the ups and downs has historically been a more prudent approach for mutual fund investors. Those seeking to capitalise on short-term market swings would be better served (or 'disserved') by other investment vehicle derivatives. While the system glitch was certainly frustrating for impacted investors on June 4, it serves as a reminder that mutual funds are meant for patient capital, not frenetic trading. At the end of the day, attempting to buy at the lows and sell at the highs is an enticing but difficult game to win consistently. For most mutual fund investors, a better strategy is to have an appropriate asset allocation, invest regularly, and resist the temptation to overtrade based on day-to-day market movements.

Equity-based mutual funds are an asset class meant for years and decades. On that scale, the movement of one day will not matter that much. Even if you convince yourself that it does, you can hardly have enough cash to invest enough in one day to make an actual difference in your life. The urge to try and catch the bottom or top tick of the market is understandable, but it often proves futile in practice.

Even professional traders with cutting-edge technology and instantaneous market data find it difficult to precisely time entries and exits. For the retail mutual fund investor, this task becomes even more daunting. A much sounder approach is to have a disciplined investment plan, adhere to asset allocation based on one's goals and risk tolerance, and tune out the noise of daily market fluctuations. While getting the absolute lowest NAV may provide a psychological boost, it is ultimately meaningless. The investors who are able to do that are the ones who will truly be greedy when others are fearful - buying when prices are depressed but holding firm through volatility. Perhaps the system glitch preventing impulsive trading may have been a blessing in disguise for some.