This question is not about what is the right time to enter or exit the market, to warrant patronizing answers. It\u2019s about a specific fund. Every good fund manager follows a process. To earn better than market returns, a fund manager constructs a portfolio different than the market following a process or betting on some factor. This portfolio return will not move lockstep with the market return. It will lag or lead the market from time to time. Every outperformance will be followed underperformance and vice versa. Yes there is no process that works all the time. So we need to answer \u201cWhat is the right time to enter a process?\u201d<\/strong>\u00a0<\/p>\n And also it corollary \u201cwhat is the not the right time to enter a process?\u201d<\/strong> This is very important and perhaps the answer to why >70% investors bail out from an equity mutual fund<\/a> within 24 months of investment? Despite knowing that investing in equity mutual funds comes with an obvious caveat that you have to stay invested for long term.\u00a0<\/p>\n The primary reason in our opinion is attributable to immediate underperformance of a mutual fund after purchase. Industry wide practice has been to invest in funds using past performance<\/a> and selecting the most recent top performer.\u00a0<\/p>\n Since these particular fund have already performed well, and that means the prices of the stocks they own have risen handsomely. Further increase may not be that stellar, so its underperformance starts which probably last for 12-24 months. This leads to disappoint for an investor and he bails out just before fund\u2019s outperformance kicks in. Using historical data, we identified that latest performing fund gets maximum inflows. And so the numbers bailing out could be large.\u00a0<\/p>\n Research Affiliates has highlighted in its white paper<\/a>, \u201cInvestors often choose these strategies\u2026based on recent performance\u2026If the performance is due to the strategy becoming more and more expensive<\/strong> relative to the market<\/strong>, watch out!\u201d<\/p>\n To avoid this disappointment cause by mistimed entry and exit and in contrast staying invested for longer term in a mutual fund, we recommend funds that are likely to perform in future rather than top past performance. While forecasting future performance is difficult, we do not aim to precisely time it nor are we trying to accurately forecast the future performance. The objective is to save ourselves with a likely disappointing performance triggering our exiting and not maximizing returns by picking the best performing fund. This would promote productive behaviour amongst investors and give them a better mutual fund investing experience. And since we recommend only \u2018andar-se-strong\u2019 funds<\/a>, the performance over 3 years is likely to be reasonably good.<\/p>\n To start with, we focus on Mutual Funds who typically follow buy and hold process as they are likely to have more predictability and higher chance to beat the market as opposed to high turnover funds.<\/a>\u00a0<\/p>\n With our expertise and experience to value individual stocks, we compute upside potential for all the stocks held by mutual funds largely.\u00a0 Since mutual fund portfolios are published every month, we estimate their upside from current market prices. This way we have upside potential for every equity mutual fund from today.\u00a0<\/p>\n Fund A<\/strong>\u00a0<\/p>\n![\"\"](\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2018\/12\/Why-an-estimate-of-future-upside-is-more-useful-than-past-performance-when-investing-in-Mutual-Funds-1-4.png\")
<\/a>\u00a0<\/p>\nAn estimate of the future upside helps stay invested and hence success<\/strong><\/h2>\n
How do we estimate the future upside and how it helps improve returns?<\/strong><\/h2>\n
![\"\"](\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2018\/12\/Fund-A-1.png\")
<\/a>\u00a0<\/p>\n![\"\"](\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2018\/12\/Fund-B.png\")
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