Is It The Right Time To Invest Lump Sum?

The year 2018 happens to be quite eventful for the equity markets. There were lot of events that led to the heightened volatility in the equity markets. It all started with the reintroduction of long term capital gains (LTCG) tax, then came the rise and fall of crude oil prices, and most recently, the results of elections in five states and, finally, the resignation of Urjit Patel as the governor of the Reserve Bank of India. The worst impacted stocks due to these events were the mid-caps and small-caps, which saw a sharp cut in their prices.

So, there is a fear among the investors whether the same situation would continue in the year 2019, which will also witness general elections. Investors are wondering whether it would be the right time to invest lump sum and grab the gems in the falling market.

In order to understand this, we did an empirical study and dived deep into how the markets have reacted in similar situations in the past.

Mutual Fund Performance

To get a better idea of the performance, we divided our study market cap-wise as it gives a better picture about which of the market-cap funds are better placed to gain going ahead. Our study of annual return of mutual fund schemes since 2006 throws an interesting fact that there are no two consecutive years when the mutual fund schemes on an average have given negative returns (some funds might have generated negative returns). In the current year, we have seen that all categories of equity funds have given negative returns in the last one year and hence, going by the history, the next year is likely to be a good year for the equity funds.

Going one step further, we tried to analyse the performance during the election year and one year after that. Again, we found that funds have generated better returns in election year as well as the following year. For example, in 2009, large-cap funds on an average generated 74.38%, while small-cap funds generated 92.38 % return. The performance was once again repeated in year 2014 and it is most likely to be repeated in 2019.

Equity Performance

Since equity mutual funds are derivatives of equities, we wanted to know if their (equity fund) performance is different from the stock market performance. We see that mutual fund performance closely follows the stock market performance. If we particularly look at the years before the elections in 2008 and 2013, the large-cap, mid-cap and small-cap equity indices have not done too well. On the contrary in the election year 2009 and 2014, these indices have performed well, similar to the performance of mutual funds. 

The above graph clearly guides us on how the markets have moved over the years and how they have performed specifically in the election years. The year before the election year, markets have not performed well. However, in the election year, markets have performed very well. The data shows that in 2008, the year before the elections, markets have not performed well with large-caps, mid-caps and small-caps giving negative returns, but in the election year 2009, markets have performed exceptionally well. This was repeated in the year 2013, which was a year prior to the election year, and 2014, which was the election year.

Now let us delve individually into the large-cap, mid-cap and small-cap space on a monthly basis and analyse how these have performed specifically in the election years.

So, after analysing the above, the question remains the same: Is it the right time to do a lump sum investment in mutual funds now? From the above analysis, we can conclude that looking at the past behaviour, there is high probability that the new year 2019, which is also the election year, investment performance would be pretty good. So, it can be said that this is the right time to invest lump sum in mutual funds. Also, from the above behaviour, after the fall in January, it would be the right time to enter the market. However, people who are having their SIPs may continue with the same. The lump sum investment must be looked as an opportunity and should be done only after you have made adequate provision for your needs.