How the Market Behaves at the Start of the Month?

Change is the only constant, a proverb most suitable for understanding the sentiments and trends of the market. The dynamic nature of the market ensures that it will change every minute and every day, making it difficult for even the most seasoned investors to get their predictions right.

In this article, we will look at how the market behaves at the start of the month so you can make better decisions. One such trend that has been doing the rounds is the Turn of the Month (TOM) effect on different stock markets across the globe. According to this effect, the trading volume of stocks generally increases, and so do the returns at the beginning of each month.

Many experts believe it is because most employees and professionals who form a major chunk of active investors in the market get their salaries at the end of each month. Since a majority of these investors invest in SIP plans, a huge investment flows into the market in the first few days of a new month.\

However, this phenomenon also raises a question: If everyone is investing in SIPs during the initial days of a month, shouldn’t this lead to an increase in the Net Asset Value (NAV) of the fund? Will this not lead to funds having higher NAVs but generating low returns?

Let us understand whether this trend holds ground through two different indexes—one from the BSE Sensex and the other from Nifty50. But before that, let us look at what these indexes are.

• While there might be an increase in trading volume at the start of the month due to salary inflows and SIP investments, the impact on overall market performance and NAV growth is minimal.
• Market trends are cyclical, and understanding seasonal patterns can help traders make better investment decisions.
• Avoid trading in the first hour due to market volatility, especially if you're new to trading.

The BSE Sensex, or the Bombay Stock Exchange Sensitive Index, also known as BSE 30, is a market index based on the free-float market capitalisation of the 30 most established companies that are financially prudent and have been delivering good business in different industries of the Indian economy. These 30 companies comprise some of the biggest and most traded domestic Indian companies representing different sectors of the economy. The BSE Sensex is considered to be the pulse of the domestic stock market of India.

The Nifty 50 is another broad-based stock market index that represents the weighted average of the top 50 companies in the Indian equity market from 12 different sectors. The funds of the Nifty 50 are passively managed index funds.

Now that you are familiar with the two most widely used market indices in India, let us understand whether the turn-of-the-month effect exists.

After analysing NAV trends of the SBI Nifty Index Fund and LIC MF Index Fund for more than 24 months, the following conclusion was drawn:

The net asset value (NAV) of these funds did not show any drastic increase in the first week of a given month, which points to the fact that the assumption that we considered was not true regarding the turn-of-the-month effect. Although a lot of investors buy and invest during the first week of a new month, those volumes are negligible when seen in relation to the total volume of transactions that take place throughout the month. Therefore, the NAV does not reflect the increase in trading activity.

In addition, there are a few tips that you need to keep in mind before you start your investment journey through trading.

1. The right time of the day during market hours to invest

The beginning of any day is marked by a lot of trading activity and prices are known to fluctuate during the opening hours of the market, which also makes it very volatile. If traders are skilled and experienced, they will be able to identify trends and make quick transactions to capitalise on any emerging trends. However, for someone new to the process, this can seem overwhelming, and they can also experience losses if they do not act quickly. As a beginner, you should refrain from trading in the early hours, especially the first hour of the trade.

2. Understanding the timing and patterns of the market

Market timings are dependent on short-term pricing patterns and are devised in such a way that traders can pick out the market's highs and lows within a single day.

Market patterns are cyclical. Hence, certain patterns and trends repeat themselves every season or during a specific time of the year, which prompts traders to solidify their positions before any fluctuations occur.

For example, if a trader knows that the markets will usually perform strongly before Diwali, then they will start investing beforehand to make sure their positions are locked in and then can make good returns during the festive weeks.