Mutual fund buying – A follow up post

Well I was expecting a fair bit of response on my post of yesterday and it has happened along expected lines. A lot of readers could appreciate the fundamental logic behind my method and some wanted to follow it too. At the same time a few wanted me to explain with some example from earlier and also be clearer about how exactly the method will work. As a blogger, readers are the reason for why I write a post, so let me try and discuss more elaborately.

Let us take the example of ICICI Focused Blue Chip Fund and assume that we are using Nifty as the benchmark index for it. Now, if you look at some basic data of this fund for the direct plan of this fund for the past year, you’ll observe the following:-

  • 1 year return of this fund is 2.54 % while that of Nifty is in the negative zone. So as expected of an actively managed fund, it has done better than the index.
  • However, in this period the Nifty was fluctuating between levels of 7500 and 9000. If you look at the NAV of the fund over this period you will see that it has tracked the Nifty quite closely.
  • In this one year the CNX Nifty had levels of 8000 or lower on several days. Obviously the NAV of the fund would have been a low one on those days. 
  • The whole idea about my buying MF is based on tracking these possible lows and buying on those days.

Now many will say that this is in hindsight and what if Nifty had an unidirectional up-move? Well, this can happen but in that case you are anyway buying MF units at high NAV as far as standard SIP is concerned. Now, if you free yourself from the constraint of having to invest in every month the scenario changes rather dramatically. You have the money to invest, you can afford to wait till the market drops.

How do I know the market will drop? That is where you need some knowledge of the market and the business environment to take a call. However, it is really not practical that in our current environment the market will only move up. While the 200 DMA for CNX Nifty is going down, you can afford to wait and not buy. Use this tool which is easy to track – once the trend reverses go ahead and buy. Whether you want to buy at one go for the year or not is something you need to decide, even though I will not recommend that. For my own investment I think 4-6 purchases in a year will be the ideal figure.

OK, so for someone starting to invest in this fund today, what is really the outlook for the next one year by using the method that I have advocated? I definitely think there will be buying opportunities in the next 2-3 months. The next downtrend can be after the budget. Finally a poor monsoon and elections in the states will most probably result in another opportunity.

In summary, I plan to track the 200 DMA for Nifty closely and hope to invest 4 -6 times, most probably in December 2015, January 2016, July 2016 and September 2016. Of course, these can change if unexpected things happen such as the BJP winning the elections in West Bengal – highly improbable. In any event though my returns from these investments both short and long term is bound to be better that what my SIP returns from this fund has been in the past year.

I hope I have been able to convince you to try this out and check what happens for a year.

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14 thoughts on “Mutual fund buying – A follow up post

  1. Current Nifty PE Ratio on 04-Nov-2015 is 21.87.
    Since NSE started, every time when Nifty’s Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.

    These are the metrics (p/e – price to earnings, p/b – price to book value, EV – enterprise value) to be tracked by fundamental investors for long time.

    http://craytheon.com/charts/nifty_pe_ratio_pb_value_dividend_yield_chart.php

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  2. Dear Roy, After watching DMA vs Nifty level chart , i would like to clarify few points with you.

    1. What is the time period (1Y, 3Y or 5Y) to choose to compare DMA vaue vs Nifty for comparing large cap funds.

    2. For 3 y DMA value, What i have found that , from Aug 2013 til June 2015, Nifty > DMA values. So Should an investor has to wait during this period to invest in MF. Or He can park in liquid/USL funds for the opportunity. Because an investor like me, if i have money in account, i may spend for other than goals.

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  3. How I know trend has reversed…how to track…that reversal point ? On week to week basis we get false short term signals…like currently 7500 to 8700 nifty in last 6/7 months.
    Thanks

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  4. Please make a post on how to identify trend reversal of 200 DMA of nifty with an example if possible. And also could you share some possible websites within which we can check whether DMA is falling or rising?.

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  5. At a very crude level , can this be a good approach –

    Follow the relevant index at around 2:30-3:00 pm daily and based on the value at that point of time , make a buy call ? I understand that things may change after 3:00 pm but the chances are less.

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