Every Mutual fund professional worth his salt has at some stage told you (us): MARKET TIMING DOES NOT WORK. Correct? the most important 5 words that always come together are these 5!

Be that as it may, it is sexy to come on TV and say “if you had just removed 20% of your portfolio at 41,700 Sensex..and re-entered at 27564, just imagine how much money you could have made”. People do that, claim they have a theory and how they have made it work.

The cricket equivalent is “if you can just bowl 20 overs a day at 144kph…”. Well that’s the difference between a McGrath and Ajit Agarkar. Simple, right?

Market timing is the sexiest topic in Equity Investing. Warren Buffett has done it. George Soros does it regularly, Benjamin Graham told us “when market is dangerously high..you should sell”. So why is Market Timing so hated? Especially when there is a lot of proof that market timing SURELY reduces the volatility in your earning. I am not saying that the total return will be higher, but I can assure you that Standard Deviation will be lower. The problem with market timing is to look for “one measure” that tells you a) market is over-valued b) market is going to fall c) market is a screaming buy. Many great minds have over the past 100 years tried arriving at this magic number, not with great success. Price/earnings ratios, price-to-book value, dividend yields and even the ratio of stock prices to the replacement value of corporate assets (Harshad’s brother explained to us why ACC was worth buying at Rs. 12000!) can all be used to show, with perfect reliability, when the stock market was overvalued. However for many of these things to work money should have a cost. Oops what’s that? we will leave it for another day!

Now lets come to the Mutual Funds. They tell you that Market Timing is not possible. However in the month of April they tell you “if you had invested in Balance Advantage Fund…you would have got 4% return while the equity funds are down by 22%”. Fantastic theory, HOWEVER, THEY tell you that after the journey is over.

Suppose you have a range of vehicles – from 2 wheeler, a luxury car, a limousine, a 4 wheel drive,…well everything. You have no clue about which car to use when. So whenever you have to go somewhere you ask an expert and he chooses the appropriate vehicle. Great. He is an expert and tells you “oh you are going for a Sand dune drive – use your 4wd. NO, not your Mercedes.

You see the difference? this consultant tells you BEFORE THE START of the journey which vehicle to use. The Mutual fund industry did not tell you in January that “shift all your investments to BAF”. However, in April all of them flaunt the BAF in April. Nothing wrong – like my photographer friends tell me “we show only the best, not all that we shoot”. So, this is fair. However there is a catch. Whenever they have an NFO they do manipulate you (through their agents) that “Pharma is a great theme” or “Metals are a great theme”. Amusing right? So there seems to be no easy solution.

Look at this solution now – go and look at the Sensex. Suppose 20% is BFSI, 25% is IT, 22% is Pharma, 12% is Auto, 11% is metals, 5% Fmcg, and 5% Infra.

Let us say you want to be invested 80% in equity, and 20% in debt. So you should put 80% in an Index fund, right? Well, lets bring a twist.

Invest in ETF of bfsi, IT, pharma, auto, metals, Fmcg and Infra – in exactly the same proportion of the Index. Of course re-balancing is an issue, but I can assure you one thing – it will reduce the VOLATILITY of your equity portfolio.

Soch lo.