Post the whole SIP vs lumpsum analysis, I wanted to see what the XIRR would be if I could (somehow) time my investment. Of course everyone says "You cannot time the market", especially as a retail investor, but the great thing with hindsight is that we get 20/20 vision. In the past, I have done some weird analysis before setting up my SIPs - which day of the week works best for SIPs, which date of month works better etc. To be fair, it does give me some results but not so much of a delta that I can claim it to be a game changer.
The strategy I back-tested for timing the market was fairly simple. I decided that every time the index would drop over 2%, I would invest INR 3,500 in the fund. Here is the deal though, since we cannot predict how often this will happen, we cannot allocate a certain fixed amount to this strategy. But this was the best way for me to calculate XIRR. Also, this would mean I would need to wait close to 3PM and place the order so that it gets that day's NAV.
Which index to use? I tried with both Nifty Smallcap 250 and Nifty 50 (just to see if the broader sentiment is reflected by small caps). Interestingly the Nifty had a 98% correlation with this fund compared to smallcap index which had 91%!
Here were the results:
Nippon India Small Cap Fund | Invest Based on Nifty movement | Invest Based on Nifty small cap 250 movement | Regular weekly SIP |
XIRR | 27% | 24.5% | 24.1% |
There is a 2.9% improved XIRR on this fund if I use the Nifty movement based investments. Here is the issue though
There is manual effort required to trigger direct MF fund investments - since I have not seen any easy DIY trigger based SIPs for Nippon
The analysis has to be done for each fund we are interested in, and the right index , right threshold has to be identified. For the analysis I did, i looked at dips below 1% but it gave me no noticeable difference if I timed it that way.
Timing - if we miss the 3PM window to place the order, we will end up with the next day NAV on direct funds. Before trying such strategies with regular funds, we need to check what NAV is allocated based on the platform used.
The net takeaway for me was, I can push in excess funds using this strategy, but keeping this as my primary mode of investment seems too much effort for marginal returns.