We focus on a tactical entry and exit technique for small cap mutual funds. That is the second such article. Within the first half, we mentioned a method based mostly on the ratio of the small cap index to Nifty 50. This had a decrease threat than a scientific funding in a small cap instrument and a greater risk-adjusted return (return per unit threat taken). See: Tips on how to scale back the chance of investing in a small cap mutual fund.
On this article, we will focus on the usage of double-moving averages. This has a better threat than a scientific funding in a small cap instrument with a potential for greater reward. Even at this stage, it ought to be apparent that the ratio-based strategy is way superior, however for what it’s price, Allow us to have a look at the info. This examine extends a earlier report: Don’t use SIPs for Small Cap Mutual Funds. Do this as an alternative!
Earlier than we proceed, a number of warnings, disclaimers and caveats ought to be disclosed. Except you admire these, please don’t proceed additional.
- The entry and exit sign chosen (defined under) is unfair and based mostly on previous information, which isn’t too lengthy (solely since April 2005). The identical criterion could or could not work in future. Just like metrics like PE and PB, this may change as market historical past is added.
- A backtest could look great in the present day, however that doesn’t assure it should work in future. See, for instance, A threat in market timing that 122 years of backtesting didn’t reveal! There isn’t any assure that it’ll work in future.
- That is very true of most Indian indices, notably small cap indices, the place the historic information is kind of brief, and the precise traded historical past is commonly even shorter.
- Anybody who makes use of the concepts described right here or in our tactical asset allocation archive of articles does so at their very own threat. Freefincal or this creator/editor is just not accountable or responsible for any beneficial properties or losses that will end result.
- Outcomes proven in backtests don’t think about future market actions, human feelings, taxation and exit masses. All these would impression the result of market timing.
Proven under is the NAV (blue), the six-month shifting common (inexperienced), the twelve-month shifting common(crimson) and the dotted line, which is the same as “1” when the inexperienced line is above the crimson line (6MMA > 12MMA) and “0” if 6MMA < 12MMA.
- Systematic technique: Regular SIP in a small cap fund (index on this examine)
- Tactical technique with double shifting averages: If 6MMA > 12MMA, push all cash into the small cap fund. If 6MMA < 12 MMA, exit the small cap fund and purchase money (“yielding” about 6% yearly), Sensex/Nifty, or gilts (three completely different choices). On this case, we’ll solely take into account money and Nifty. Taxes and exit masses haven’t been thought of all through.
There are some earlier research with this double MMA mannequin. Additionally see A software for tactical shopping for and promoting utilizing shifting averages.
This can be a single 18Y run evaluating the portfolio development of the double MMA technique vs systematic funding in a small cap index. Discover the tactical strategy has greater volatility.
We are able to get additional insights if we run the evaluation for ten years. Nonetheless, please be aware that the info (108 10Y runs) remains to be restricted. So, this shouldn’t be thought of as a chance of success.
Double-moving common examine with money
- Prime left panel: the XIRR. The tactical technique has performed fairly effectively for the interval studied, however the return unfold is a minimum of as a lot because the tactical strategy.
- Prime proper panel: The portfolio’s most drawdown (max fall from peak) is proven (the much less unfavourable, the higher). The tactical technique has a better drawdown. That could be a greater threat.
- Bottom left panel: The usual deviation or volatility (decrease the higher). The tactical strategy has greater volatility.
- Backside proper panel: the utmost variety of months the portfolio was under its peak or underwater (decrease the higher). The tactical technique takes an extended time to get better.
Double-moving common examine with Nifty (as an alternative of money)
With Nifty (as an alternative of money), reward and threat (drawdown and volatility ) have decreased.
In abstract, the tactical entry and exit technique for small cap MFs utilizing the ratio of the small cap index to Nifty 50 seems superior to the double-moving average-based technique.
Discover our full archive of tactical asset allocation research.
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