We always think that it is best to invest when markets are down. But how often are we able to do it? Not regularly.
There are 2 reasons.
First – The markets don’t go down regularly.
Second – When they do go down, we don’t have the guts to go out there and invest. And that is because, either we don’t have the money to invest AND / OR we don’t know where to invest.
And frankly speaking, both are genuine problems. It happens to me, you or almost anyone I know.
I was just thinking about this whole scenario of investors feeling handicapped when markets go down. They want to invest. But don’t know where to invest. And if they do know where to invest, then they don’t have funds to do it.
So is there a solution to this problem?
I think there is. Atleast I thought there was. 🙂 I am not sure though.
And if there is a solution, then it is ought to be based on the following two thoughts: First is that it does not make sense to stay out of markets at any time. I covered this topic a while back at – Why You Should Invest, Even if You can’t Beat the Market. And Second is an extension of the above thought – it seems wiser to invest ‘more’ when markets are down. So how do we use these these two (thoughts) in combination to gain the maximum benefit?
I came up with a very primitive hypothesis:
Investing regularly (Rs X) & periodically making lumpsum investments* when markets are down, will fetch higher returns than regularly investing double the regular amount (Rs 2X) over a period of 10-15 years in a decent, well diversified mutual fund.
* This lumpsum amount would be an accumulation of Rs X every month, which will be used at one-go when markets are down (at a pre-decided trigger point).
To test this hypothesis, I chose HDFC Top 200 as the fund. The choice of fund was because it is a stable, well known and proven fund. And my guess is that If you had to choose a fund blindfolded, chances are you would choose HDFC Top 200. Ask anyone and almost always, this fund’s name pops up.
So coming back to the analysis, I went ahead and used last 20 years data to prove my hypothesis.
There are 2 scenarios being compared here:
First is where Rs 5000 is invested every month in HDFC Top 200. An equal of Rs 5000 is also parked every month in a Recurring Deposit which I call Market Crash Fund. (I am ignoring the interests accrued for simplicity). The money keeps accumulating in this market crash fund till the time a trigger* point is reached.
Second scenario is where Rs 10,000 is invested in HDFC Top 200 every month. Plain and simple.
*The trigger point for utilizing the market crash fund is when the average monthly NAV of the fund is at more than 20% discount to highest average NAV, which has been achieved in last 3 years. For example, if the fund reached a maximum NAV of Rs 100 in last 3 years, and the current NAV touches 79 (i.e. 21% discount) – then entire money accumulated in Market Crash Fund is used to buy units of Mutual Fund at lower NAVs.
So with these assumptions, lets see what happened.
Starting October 1996, the total money outgo in both scenarios is Rs 21.9 Lacs. In first scenario, Rs 10.95 lac is invested as SIP of Rs 5000 every month whereas rest is invested in lumpsum at regular intervals as and when a trigger point is reached. In second scenario, entire Rs 21.9 lac is invested as SIP of Rs 10,000 every month.
But here comes the surprising part. The returns of above strategies are not in sync with my expectations. My expectation was that the MF+RD combination which shifts money from RD into MF when markets go down, will beat a simple MF SIP of amount equal to MF+RD monthly investment. But results are completely opposite.
The MF+RD combination delivers Rs 2.14 crores whereas a simple MF delivers Rs 2.43 Crores.
Value of Investments in HDFC Top 200 in both scenarios
In the graph below, the dark blue line indicates the value of Market Crash Fund which accumulates Rs 5000 every month till the trigger point (Current NAV < 80% of Max NAV in last 3 years) is reached. The light blue area graph shows how low is current NAV (in %) with respect to maximum NAV in last 3 years.
Lump Sum Investment Trigger Points (On Basis of current & last 3 years NAV)
Big figures indeed for small Rs 22 Lac investment. Isn’t it?
But what about the hypothesis?
How is it that a simple MF SIP of Rs 10,000 a month beats a combination of Rs 5000 a month MF and lump sum investments when markets are down?
Is it something about the assumptions, that went wrong?
Is it that trigger point should have been either more than 20% or less than that?
Is it wrong to split the investment amount into 50%-50% for SIP & RD in first scenario?
Is it because of the extraordinary bull runs of 2003-2008 that this analysis went for a toss?
Is it that HDFC Top 200 has been a stellar fund and any other fund would have given results in line with hypothesis?
Is it entirely wrong to do this comparison at all?
I am not sure if I know answers to these questions.
What do you think? Do let me know of your thoughts about the idea of splitting money (MF & RD) as done in first scenario and also about my assumptions regarding trigger points.
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