![]() In “post-earning” phase drawdowns hurt us very badly. ![]() Typically, We invest during our “earning” phase continuously and start withdraw during “post-earning” (retirement) phase. ![]() Practically, investment is not one time event. The benefit is evident … drawdown is neatly managed for this investment. In this example its assumed that its one-time investment. We are able to reduce the risk in mutual fund investments by more than 60% by simply implementing a moving average with NAV of a fund. Our CAGR dropped by 2%, how about the risk?Īs you can see, the maximum drawdown was just 20% in 2008, when the whole world markets were crashing more than -55% in that year, your investments would have been down only by -20%.ĭuring the other years, the average downside was just -5%. 1 lakh Invested in 2002 at the time of inception has grown to Rs.20 lakhs by 2018. The red line is the 10 month moving average value plotted. The above chart shows the NAV of HDFC TOP 200 fund. Re invest again in it,only when the NAV goes above 10 month moving average. Whenever NAV of a mutual fund goes below 10 month moving average, just exit from it. How many investors can tolerate such downside fluctuation? Sound great! What about the risk involved? Remember the period 2008? When market collapsed, 50% of your capital would have wiped out, whatever you gained prior to that would have been lost in the financial crisis? 1 lakh Invested in 2002 at the time of inception has grown to Rs.25.9 lakhs by 2018. The above chart shows the chart of NAV of HDFC TOP 200 fund since inception. Let’s see how it can help us in reducing the risk. 10 Month moving average is almost equal to 200 days moving average, but why not 200 day MA? Why should we use 10 month MA?īecause, the daily moving average contains so much of noise due to daily fluctuations that we see in the market, using 10 month moving average will remove these noise. Its what we call it as MA10,which is nothing but a 10 month moving average. None of them worked, later I figured that a simple parameter can reduce the risk considerably. We have tried various parameters with quantitative techniques, ran many complex simulations to come up with a risk management model. One of the subscriber from our telegram channel asked us, if there is a way to reduce his risk exposure to mutual funds without using hedging techniques.īut so far, people haven’t tried a quantitative approach to reduce the risk with mutual fund investments. People usually diversify their portfolio or allocate their capital to different asset classes.
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