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We talk about 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 danger than a scientific funding in a small cap instrument and a greater risk-adjusted return (return per unit danger taken). See: Methods to cut back the danger of investing in a small cap mutual fund.
On this article, we will talk about the usage of double-moving averages. This has a better danger than a scientific funding in a small cap instrument with a potential for larger reward. Even at this stage, it ought to be apparent that the ratio-based strategy is way superior, however for what it’s value, 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 recognize these, please don’t proceed additional.
- The entry and exit sign chosen (defined under) is bigoted and based mostly on previous knowledge, which isn’t too lengthy (solely since April 2005). The identical criterion could or could not work in future. Much like metrics like PE and PB, this may change as market historical past is added.
- A backtest could look fantastic in the present day, however that doesn’t assure it can work in future. See, for instance, A danger in market timing that 122 years of backtesting didn’t reveal! There isn’t a assure that it’ll work in future.
- That is very true of most Indian indices, significantly small cap indices, the place the historic knowledge is kind of quick, 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 danger. Freefincal or this writer/editor is just not accountable or responsible for any positive factors or losses that will outcome.
- Outcomes proven in backtests don’t consider future market actions, human feelings, taxation and exit masses. All these would affect the end result of market timing.
Proven under is the NAV (blue), the six-month shifting common (inexperienced), the twelve-month shifting common(purple) and the dotted line, which is the same as “1” when the inexperienced line is above the purple 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 totally different choices). On this case, we are going to solely think about money and Nifty. Taxes and exit masses haven’t been thought-about 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.
It is a single 18Y run evaluating the portfolio progress of the double MMA technique vs systematic funding in a small cap index. Discover the tactical strategy has larger volatility.
We are able to get additional insights if we run the evaluation for ten years. Nevertheless, please notice that the info (108 10Y runs) continues to be restricted. So, this shouldn’t be thought-about as a chance of success.
Double-moving common examine with money
- Prime left panel: the XIRR. The tactical technique has finished fairly nicely for the interval studied, however the return unfold is at the very least as a lot because the tactical strategy.
- Prime proper panel: The portfolio’s most drawdown (max fall from peak) is proven (the much less damaging, the higher). The tactical technique has a better drawdown. That may be a larger danger.
- Bottom left panel: The usual deviation or volatility (decrease the higher). The tactical strategy has larger 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 danger (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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