The Hindu Business Line : Time vs timing

Systematic Investment Plans (SIPs) of mutual funds often claim that the time in the market matters more than timing the market. It is true that timing the market to perfection — buying when the market has bottomed out and selling when it has peaked — is well-nigh impossible even for a dyed-in-the-wool chartist.

Identifying the bottom, the peak and the plateau of the price curve for individual scrips as well as for the entire market has a fairly high mortality rate what with there being a prolonged spell of boom or decline defying prediction of price movements.

Evening out?

Hence the SIP blurb quoted above is bound to strike a chord with one. But those taking the monthly SIP must ponder over this claim carefully without allowing themselves to be swept off their feet. While by handing over a monthly sum to the mutual fund, the investors may vicariously be buying shares throughout the year thus evening out bad timings with good ones, the same sales-pitch does not extend to the vicarious sales made by them because the decision to churn the portfolio every now and then is in no way linked to the SIPs taken from the investors.

At any rate, a long spell of stay in the market by itself does not guarantee profits just as a dour and determined stay in the wicket does not guarantee runs to a batsman.

Even the claim of advantage of averaging accruing to the investor through SIP has to be taken with a pinch of salt given the fact that each month a mutual fund need not buy the same basket of shares. The benefit of averaging accrues when one buys a scrip for, say, Rs 300 one month, for Rs 350 the next month and Rs 400 the third month.

But if a mutual fund buys scrips other than the ones bought in the initial month, where does the benefit of averaging accrue? At any rate, averaging by itself need not be a great virtue. In the above example, one can claim that his average cost is Rs 350 per share, whereas the ruling price at the end of the third month is Rs 400.

Illusory benefit

But should the prices have moved in the reverse direction, the average cost would still be Rs 350, to be sure, but the ruling price at the end of the third month would be Rs 300 giving rise to a notional loss of Rs 50. The point is averaging has nothing to commend itself except an illusory, accounting benefit.

Imagine a person buying 500 shares of a company at Rs 1,000 each and following it up with another 500 shares at Rs 600 each after a steep decline. He might have brought down his average cost to Rs 800 but then it may prove to be a cold comfort should the price decline further to Rs 500 with no prospect of the down-the-hill journey being halted.

Had he seen the writing on the wall, he should have sold at Rs 600 the 500 shares he had. That would have confined his loss to Rs 2 lakh whereas obsession with averaging has landed him with a loss of Rs 3 lakh assuming the shares had to be sold at the rock bottom price of Rs 500 after indulging in the harebrained game of averaging.

All this is not to debunk SIP. To be sure, SIP does encourage investing in instalments and is useful for those who cannot pitch in huge money in one go. But its time-in-the-market refrain sounds hollow and specious. It is what one does in the time spent in the market that matters.

Churn intelligently

In other words, it is neither the time in the market nor the timing the market that matters. Instead, intelligent churning is what market operation is all about. This applies as much to an individual investor as to a mutual fund. And this need not call for timing skills. Instead it calls for the ability to sense opportunities for better investment-mix.

The one who sits on his investment acquired at face value and bides his time which arrives, say, after ten years, might have successfully timed the market but need not necessarily have maximised his returns, whereas the one who seized the opportunities during the same period with the same initial investment could have earned more.

(The author is a Delhi-based chartered accountant.)

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