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Does timing the market work?

Can you earn substantially more by investing at market lows? We studied data spanning two decades to find out

Does timing the market work?

When stocks hit their 52-week high or low, a lot of headlines appear in the newspapers. When the Sensex or the Nifty 50 fall to a year's low, investors naturally become worried. But none of these matter if you invest regularly. We have gathered some data that backs up this claim.

We studied three approaches to investing over the last two decades and found that regular investing always comes out on top.

Since tax-saving funds are among the most popular mutual fund products, we looked at five of the oldest funds (all from different Asset Management Companies or AMCs) and their performance when buying them at highs, at lows and at high-lows. The results may bust a lot of myths.

Many investors wait for the bottom to invest. Although it is difficult to know if the bottom for the year has been hit, many investors put in money when markets hit multi-month lows. That being said, let us look at two scenarios. In the first one, an investor puts in Rs 1.5 lakh at the lowest level of Sensex in each fiscal from 1996-97 till 2017-18 in all the five funds. In the second scenario, she repeats the same thing, except, this time she invests at the highest levels of Sensex. For each fund, the investor put in Rs 33 lakh in 22 years.

  At lowest levels At highest levels
Scheme Name Value (Rs Cr) Return (%) Value (Rs Cr) Return (%)
Aditya Birla Sun Life Tax Relief 96 8.30 24.41 5.93 21.83
Baroda Pioneer ELSS 96 2.28 15.16 1.55 12.33
Canara Robeco Equity Tax Saver 4.04 17.08 3.05 14.28
HDFC Taxsaver 11.24 26.58 8.38 24.24
SBI Magnum Taxgain 2.39 12.75 1.63 10.32

In the first case (which is next to impossible), she would have made anywhere between Rs 2 crore to Rs 11 crore on a mere investment of Rs 33 lakh. In the second case, she would have made anywhere between Rs 1.55 crore to 8.38 crore. The maths looks simple.

SIP of Rs 12,500 per month from 1996-97 till 2017-18 in all the 5 funds
Scheme Name Value (Rs Cr) Return (%)
Aditya Birla Sun Life Tax Relief 96 6.84 23.07
Baroda Pioneer ELSS 96 1.85 13.71
Canara Robeco Equity Tax Saver 3.48 15.51
HDFC Taxsaver 9.07 25.34
SBI Magnum Taxgain 1.96 11.49

So, in the worst case scenario (buying at peaks every time), an investor would have still gotten decent returns. Even the fund with the least returns would have given a return of almost five times.

A realistic outcome
Practically speaking, it is difficult for any investor to consistently buy at all the highs or all the lows. No one can foretell the Sensex's movement. Hence, it is much easier to do a systematic investment plan and make good money.

Instead of investing a Rs 1.5-lakh lump sum each year, if one had systematically invested Rs 12,500 per month in all the funds from 1996-97 till 2017-18, here's what the outcome would have looked like.

When you are going long-term, you have no headache. SIPs are the perfect wealth-creators, so it is no wonder investors repose their faith in this category. A mere Rs 33 lakh investment over 22 years would have returned Rs 1.85 crore at the minimum, and Rs 9 crore maximum. These figures only reinforce the fact that investors should never stop investing.