Equity investment is, by its nature, inflation-adjusted. It is essential to have equity investment for the long term to beat inflation. We should remind ourselves that we cannot manage returns directly hence what we intend to manage is the risk. Risk management is done by asset allocation (or called asset diversification) that is aligned with the timeline of the associated goal. Equity typically needs ten years to give a yield better than PPF and EPF like schemes. For retirement insurance NPS, APY and EPS should be maintained and SSY should be maintained for girl child goals. We can, not only manage the risk we undertake, but also control how much commission or entry load we pay. Hence we choose direct funds. Also, typically funds with low expense ratios will beat a similar one with a higher expense ratio in the long run! Timing of entry into the market may (or may not) reduce the downside of the equity funds. The (potentially) reduced downside is better for mental health. Yearly or half-yearly monitoring is essential and for doing proper monitoring we must have a simple plan, to begin with!


Rebalancing every year or two years is part of de-risking. This happens inherently in an Aggressive Hybrid Fund (typically) every month, hence it is inherently less risky as is borne out by its significantly low standard deviation. Yet it has beaten the NIFTY conveniently! Rebalancing manually involves tax incidents.


The NIFTY index is well diversified and represents the state of the entire economy. ETF has a low expense ratio and less internal expenses. Effectively this makes it near impossible for any active fund to beat an ETF index fund. Any strategy fund cannot keep generating alpha over an index fund for a long period of the market. This is the very nature of the system -- arbitrage opportunities close themselves! Midcap and Smallcap funds may have high returns, but it has not happened recently, what they have is the highest standard deviation meaning highest risk.


Markets will offer high returns from time to time and reaping those benefits is also part of the plan. Since it takes about ten years for an equity fund to rise so much (there is no real compounding, compounding happens in PF, not in MF) that its effective CAGR (or XIRR for individuals) exceeds the one offered by PF post-tax deduction, we must invest early and stay in the market as per a plan. SIP does not help in increasing returns, as a matter of fact, it invariably reduces returns compared to large lump sum investment done early. This is not guaranteed, but the high probability of this event makes this statement generally applicable. Timing the market is impossible for trading, it is the very nature of the system. But finding a less risky (more rewarding) time to make a long term investment is possible. Hence do not do SIP, do simple lumpsum investment every half-yearly or yearly. This can potentially reduce the downside of the (equity) funds.


Buying more when the market falls and selling equity when the market is high is called timing the market. It needs discipline and it has tax implications. The act is the same as rebalancing but it is undertaken based on market condition instead of a fixed review interval. Rebalancing by ‘timing the market’ is slightly better than fixed-interval-rebalancing because it offers you an opportunity to learn when to eventually exit equity (completely). You didn't think of that, right? Remember that the market will offer you returns but also take it away if it is not harvested.


In NPS Tier 1 we can change our asset allocation twice in a year without any penalty or tax implication which makes it a suitable experimentation field for ‘timing the market’. But there is a catch, once every year, on the date of birth of the subscriber, NPS does rebalancing. Hence here we may do a ‘timing the market’ by shifting the allocation percentage once a year instead of just submitting the same asset allocation proportions resulting in the 'ideal rebalancing’ act. This changes the allocation of new contributions and also moves funds between assets. The birthday rebalancing will bring in strict alignment with the allocation strategy yet again. By selecting Active choice instead of Auto choice for NPS and then deciding to alter the allocation to reduce the risk by ‘timing the market’ instead of only auto-rebalancing on the birthday (which also changes allocation based on life cycle allocation in Auto choice but not in Active choice) while still more than ten years away from the redemption is a reasonably safe exercise. This is possible in NPS (and not otherwise) because:

  1. There are funds available for such switching.
  2. It does not have a switching load.
  3. It does not have tax implications. 
  4. It is a very very long duration instrument.
  5. It has significant (accumulated) investment.
  6. There are only two switches allowed in one financial year, so this can't get overwhelming.


Because there are only two switches allowed in one financial year, you can harvest one bull run in a financial year. It has to be a significant one with a high degree of certainty to be worth the trouble. A high degree of certainty because you have only one chance a year and you do not want to lose to a bear run which you mistook as a bull run! This means typically that we are looking at a bull run after a significant market correction. After a huge crash generally, there is a strong rebound bull run. This has a high degree of certainty and this rebound bull run is likely to run long and fast. Two switching a year allows us to leverage only this kind of opportunity. A secular bull run has lower certainty. We may miss that good secular bull run but that is the price we pay for this NPS strategy!