So let’s get this straight. Each of us has a behaviour of our own.
And none of us can continue to behave the same way for a long period of time.
But we all know that.
The market behaviour can change every day, every minute and in fact, the market is probably changing while you are reading this sentence. How will you predict this behaviour?
Across the world, most full-time employees get their salary at the end of the month, i.e. 30th or 31st of the month. And a major chunk of these employees is active investors in stocks and mutual funds. Most of these investors generally prefer an SIP plan, because let’s face it, it’s much more convenient.
The process is simple, they invest a fixed amount of money every month for a stipulated amount of time, these payments are generally done in the first week of the month. This leads to one simple question.
If everyone is buying mutual funds on the first week of the month, shouldn’t the NAV increase and in-turn lead to the investors buying the mutual funds at a higher NAV value with lower returns?
We conducted a small analysis to determine if this notion is true or not.
(S&P Bombay Stock Exchange Sensitive Index), also called BSE 30 or simply the SENSEX is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange.
These 30 component companies which are the largest and most actively traded stocks representing the various industrial sectors of the Indian economy. Published on 1st January 1986, the S&P BSE SENSEX is regarded as the pulse of the domestic stock markets in India.
The National Stock Exchange of India is a benchmark broad-based stock market index of the Indian equity market. It represents the weighted average of the 50 Indian company stocks in 12 sectors and is one of the two main stock indices used in India, the other being the BSE Sensex.
Nifty index funds are passively managed index funds, which invest in all stocks comprising Nifty 50 Index in the same proportion as their weightage in the index. Similarly, BSE 30 index funds seek to mimic returns represented by the BSE.
We have created a scatterplot indicating the NAV trends of every month from 2015 to 2017.
In the above graph, each set of linear point represents the variation of NAV over the 30 (or 31 or 28) days of the particular month. So, if the hypothesis that the NAV must increase in the first week of the month is true, then it would be visible from the graph.
But on clear inspection of the graph, we notice that the NAV value does not show any trend within the first week of the month, indicating that our hypothesis is false. Therefore the NAV does not increase in the first week of every month. Even though a lot of investors are buying in, this is very negligible when compared to the total transactions in the market and hence increasing trends in NAV are not reflected.
The prices can go wild during the early hours of the day. We mean literally wild. The opening hours represent the window in which the market factors are volatile. A skilled trader can recognize the appropriate pattern and make a quick profit, but a less skilled trader could suffer serious losses as a result. So, if you’re a novice, you might want to avoid trading during these volatile hours – or at least, within the first hour.
Market timing is based on a short-term pricing pattern and it is strategised in a way that an investor can adequately pick the market top and bottom in a single day.
The market pattern can also be seasonal, in the sense that it can resemble how the market will behave in a given time of the year and the investor must take a position before the change occurs. For example, if a trader knows that December and January are usually strong, then he or she may invest in November to make sure that positions are locked in for the following months.
Happy investing 🙂
Disclaimer: The views expressed here are of the author and do not reflect those of Groww.