VR Logo

Difficulties in Buying Low & Selling High

Buying low and selling high is a strategy that can pay off, but it is very difficult to implement in practice

Experts often advise buying quality stocks on dips. Does the same logic apply to mutual funds? Investors use the SIP route for mutual funds. Is there any benefit of investing in mutual funds during dips?
- Danny Braganza

Buying low and selling high is a strategy that can pay off both for stocks and equity funds. But while this sounds good in theory, it is very difficult to implement in practice.

You may wait for a market 'dip' to buy a fund, but what will you do if the market keeps trending up without a correction? You cannot put investing interminably on hold. You may wait for the market to fall a bit by, say, 5 per cent, but what is the guarantee that it won't fall further?

Investing in funds through the SIP route is advised because then you need not take a call on whether a dip is large enough to buy. When you invest the same sum into an equity fund irrespective of market moves, the SIP will automatically help you buy more units when prices are lower and less when they soar high.

If you are a savvy investor who tracks the market constantly, you can attempt to supplement an SIP strategy with additional lump-sum investments when overall market valuations are really low. This will require tracking the P/E ratio of the Sensex or the Nifty. Generally, going by history, Indian bear markets have bottomed out at Sensex/Nifty P/Es of 10-12 times. But as every new bull or bear market has its own characteristics, it is best not to wait for such opportunities to begin investing in equity funds.

There is also another reason why fund investors need not worry so much about buying on dips. Unlike a stock, a fund has a diversified portfolio that is constantly changing. Therefore, the fund manager is actively taking a call on individual stocks for the fund's portfolio, buying the ones which seem undervalued and selling the ones which seem overvalued. This is why when markets fall sharply, equity funds usually suffer lower declines in NAV than individual stocks, which can sometimes fall by 80-90 per cent.

Post Your Query