Why An Estimate Of Future Upside Is More Useful Than Past Performance When Investing In Mutual Funds

Why an estimate of future upside is more useful than past performance when investing in Mutual Funds?

If you ever asked “when is a good time to invest in a specific fund”, you are likely to get one of two following answers and some very dirty looks:

“Yesterday”. Meaning you were stupid enough not to have invested in MF earlier and now you are asking an even more stupid question.

“You will never know, so do an SIP and keep investing and don’t bother what the market is doing.”

But you may have lumpsum money to invest or have been doing SIP for long and the corpus is quite large. What do you do? If you have done your asset allocation right, when the market move up and you rebalance you are confronted with the question of what to sell and at the other extreme, what to buy. So it’s a perfectly valid question deserving an answer. May not be the accurate answer, a good-enough one atleast.

Why is knowing the right time to enter a fund important?

This question is not about what is the right time to enter or exit the market, to warrant patronizing answers. It’s about a specific fund. Every good fund manager follows a process. To earn better than market returns, a fund manager constructs a portfolio different than the market following a process or betting on some factor. This portfolio return will not move lockstep with the market return. It will lag or lead the market from time to time. Every outperformance will be followed underperformance and vice versa. Yes there is no process that works all the time. So we need to answer ...........Read More