Many readers have written to me saying that they now understand why SIP is really not the right way to invest in equity. In my last post I had written about a possible method that could be used for buying large cap funds. I am quite encouraged by the feedback and also the curiosity shown by readers as to how they could go ahead and purchase funds of other categories. Let me address it in this post.
For purposes of simplicity we will assume that the MF in question is a mid cap fund. It does not really matter which one, you can very well go with any of the top 5 or any of the long standing funds. For those readers who always insist on names, look at HDFC Mid cap, Sundaram Select Mid cap or some similar fund. The other assumption we will make is that the NAV of the fund is aligned to the Nifty Mid 100 index. Note that you can use some other index or even the fund NAV in question. The principle of the argument however remains the same.
Based on this let us look at how things currently are for the Nifty Mid 100:-
- 1 year and YTD returns on the Nifty Mid 100 are 6.3% and 9.42% respectively. So your SIP investments in the mid cap MF of your choice is giving decent returns to you.
- The above means if you buy it today, as opposed to an investment in June 2015 or January 2016 you will be worse off. Understand that a SIP is buying units at progressively higher rates in 2016.
- Current Nifty Mid 100 level is higher than 30, 50, 150 and 200 DMA. This being the case it is a bad idea to buy units of your mid cap MF now.
- Your first buying point can be when Nifty mid 100 levels go lower than 50 DMA which is about 13235 for the Nifty Mid 100. In simple terms it means that any SIP in mid cap funds do not make sense unless the above happens.
- 200 DMA for Nifty Mid 100 is about 12881 and if the Nifty Mid 100 levels approach this figure it will be a great time to buy your mid cap MF.
- How do I know that Nifty Mid 100 will go down by 500 points or 1000 points? Well, neither I nor anyone else can say this definitively. However, the current uncertain global economic situation, food inflation not coming down, corporate earning still not getting robust growth etc almost guarantees that Nifty Mid 100 will not go up in a linear direction. It may either be range bound with a range of 13000 – 14000 or there can be a deeper correction post Q1 results with it going down to 12500 or so.
- Remember that a mid cap index is necessarily more volatile as compare to a Nifty or Sensex, so a 1000 point drop is not very difficult in the 2-3 month period.
In the above situation, readers can follow the mid cap MF buying method that I have planned to use for the rest of 2016:-
- Stop all SIP in Mid cap MF, SIP works in very few market situation and this is not one of those situations.
- Wait till July end to see the impact of Q1 results on Nifty Mid 100. Put 25-40% of your 6 month investment if Nifty Mid 100 goes to 13250 or below.
- Keep tracking Nifty Mid 100 for any news based correction and check if it is moving towards 13000.
- In any case if Nifty Mid 100 is below 200 DMA start putting more investment in mid cap MF.
- You need to make a maximum of 4 purchases in these 6 months. Tracking nifty is quite easy, just check in MoneyControl for the DMA figures.
I hope this has given you a good idea as to how you can get this done. I will be happy to answer any queries or clarifications that you may need.
In the next post I will write about how to purchase small caps now.