Investors shouldn’t try to time investments in actively managed funds: Study
Premium- Between March 2011 and February 2021, Indian stocks owed their outperformance over cash to just eight months, less than 6.7% of the months in the sample
Actively managed funds are finding it increasingly harder to outperform benchmarks. Besides, the number of months contributing to overall outperformance versus benchmarks of these funds is shrinking, Morningstar India said in a report.
In a study titled, ‘Staying Invested Is The Name Of The Game’, the mutual fund research firm said that in the long haul, the stock market's outperformance over cash boils down to just a few “critical months".
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Critical months in the study have been defined as those months whose removal from the return series would eliminate the fund's outperformance over its benchmark.
“Miss those months and you will have missed the entire risk premium to be earned from holding a volatile asset such as equities," Morningstar added.
The study showed that on average, Indian actively managed diversified equity funds' outperformance for a 10-year period from March 2011 to February 2021 was attributable to a smaller proportion of months: six months or 5% of all months, which is lower than the number from the 2019 study of eight months or 6.7% of all months. This number varied across categories.
Moreover, between March 2011 and February 2021, Indian stocks owed their outperformance over cash to just eight months, less than 6.7% of the months in the sample. If the investors had held stocks for all 112 months apart from those eight months — termed "critical months," — they would not have beaten cash.
“Investors are best served to identify consistently managed funds and stay invested. Investing basis recent performance can be counterproductive, resulting in missing of critical months of performance in both the newly invested fund(s) as well as the exited fund(s)," Morningstar said.
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The study also highlighted that this phenomenon is not unique to the Indian market. In a global study released by Morningstar in 2019, it was witnessed similar trends existed for the US large-cap stocks for investments since 1926, where 5% of the months attributed for the overall outperformance over cash. Similarly, the global study of outperformance for the last 15 years found that 5% of months account for the outperformance of actively managed funds globally.
“The obvious implication of these findings is that it is exceedingly hazardous to try to time markets. Staying invested is the name of the game, be it in equities as asset classes or the funds you select to invest through," the study said.
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