Friday 8 May 2009

The Truth Behind Fund Recovery

The Truth Behind Fund Recovery

Here's an interesting insight into mutual fund investing:

And my take on the same:

  1. In general, invest in high quality mutual funds, typically 5-star rated ones
  2. 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)
  3. Park this Rs. 100 redeemed into a good quality liquid fund and wait for the inevitable crash
  4. 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).
  5. Wait for the semblence of recovery
  6. 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).
  7. 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
  8. Repeat steps 1 to 7 repeatedly.

Regards,

N


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