The Truth Behind Fund Recovery
Here's an interesting insight into mutual fund investing:
- The Truth Behind Fund Recovery - http://valueresearchonline.com/story/h2_storyview.asp?str=13174
And my take on the same:
- In general, invest in high quality mutual funds, typically 5-star rated ones
- When the market reaches the peak (let's say, index PE levels of 23-28 - Index PE is available in the link http://www.nseindia.com/content/indices/ind_pepbyield.htm), book profits at least to the extent of your original investments (If you've invested 100 and it has grown to 175, retain 75 and take out 100)
- Park this Rs. 100 redeemed into a good quality liquid fund and wait for the inevitable crash
- When there's all-round panic and mayhem and when index PE reaches levels of 11-14, invest the same in those schemes of mutual funds from good quality mutual fund houses which have crashed the most among 3-star rated funds (Typically, in a bear market, these funds are likely to fall much more than 5-star rated ones).
- Wait for the semblence of recovery
- When the markets start going up, typically, these 3-star funds will outperform the 5-star funds in percentage terms quite significantly (when the PE levels have recovered to a more meaningful level of 16-18, for instance).
- At this stage, go in for a systematic redemption of the 3-star funds and a systematic investment in the high quality 5-star funds
- Repeat steps 1 to 7 repeatedly.
Regards,
N
