Investing in ETFs: Does timing matter?

Every investor has felt the attraction of the perfect entry point in the market. The temptation to wait for a dip, a correction, or “the right moment” before investing the hard-earned money to maximise the gains. Unlike traditional mutual funds, ETFs trade on the exchange in real time, so every tick of the price feels like a decision waiting to be made. It’s a natural question, then: does timing actually matter when investing in ETFs, or is that instinct doing investors more harm than good?”

The answer depends on your investment objective. For long-term investment, timing matters less than most investors assume, but it isn’t irrelevant either.

Intraday pricing is a feature; it depends on how you use it

Unlike traditional mutual funds, which are priced once a day based on their NAV, ETFs trade continuously on the exchange during market hours. This allows investors to transact at their preferred market prices, whether for long-term investing or short-term trading. While intraday volatility may present opportunities for traders, long-term investors should avoid delaying investments in the hope of finding the perfect entry point. As the saying goes, “Time in the market beats timing the market.”

Every segment of the market will have some good and some bad years. For instance, take a look at the yearly returns of one mainline, one broader market, one multi-cap, and one hybrid index. Index data since inception (January 2011) shows that outperformance for each index has come in patches. Thus, if you miss any of those patches while trying to time your entry, it will likely erode your portfolio returns.

In the table below, take a look at the highlighted periods. For those indices, there were two consecutive years of poor returns. But those patches of poor returns have been flanked by some very good years. This looks great in hindsight, but if you had invested, for example, in the Nifty 50 ETF at the start of 2015, you would be sitting on barely any appreciation at the start of 2017.

Smoothing ETF ride

There are multiple ways to smooth the ride that don’t depend on timing. One way is to do SIP in ETFs – buy a small amount at a set period. This will help in rupee-cost averaging, creating multiple entry points and smoothening return over time.

Another is to invest in multiple ETFs from different market segments or a single ETF that invests in multiple assets. For instance, volatility for the above-mentioned hybrid index has consistently run nearly 40 percent lower than the pure equity indices across every time frame measured.

Beyond these long-term strategies, there are also short-term, mechanical aspects worth attention when you do place a trade, especially when it comes to buying or selling ETFs:

• Avoid the first and last 5- 10 minutes of trading, when liquidity is lower. Price volatility is also higher in that period.
• Watch the bid-ask spread, not the clock. Checking indicative NAV (iNAV) against the traded price matters more than which hour you trade. Recently, multiple funds traded at a premium to the iNAV, which should ideally be avoided.
• Systematic entry smooths out timing risk: staggering purchases reduces the impact of any single day’s entry point.

Long-term, staggered investment in a diversified product or portfolio helps in reducing volatility. The investor’s real advantage lies not in predicting the next market move, but in choosing the right ETF for their asset allocation and staying invested through cycles.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.