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How can market sentiment analysis help you make mutual fund choices?

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Market mood, or sentiment, is crucial in mutual fund investment as it can significantly affect how investors behave. In this article, we will discuss market sentiment analysis for mutual fund choices. We hope this market sentiment analysis guide enables investors to make more informed decisions regarding their investment strategies.

  • Table of contents
  1. Understanding market sentiment analysis
  2. Benefits of using market sentiment analysis for mutual fund choices
  3. Key indicators used in market sentiment analysis to opt mutual fund schemes
  4. Steps to incorporate market sentiment analysis in mutual fund decisions
  5. FAQ

Understanding market sentiment analysis

Market sentiment refers to the overall mood and attitude of investors toward a particular financial market or asset, such as stocks or currencies. For example, market sentiment can be optimistic, pessimistic, or even unsure about where prices are headed. Moreover, just like our emotions influence our daily decisions, market sentiment influences investors' decisions to buy or sell financial instruments. News, economic data, geopolitics, rumours all have the potential to affect market sentiment.

Benefits of using market sentiment analysis for mutual fund choices

  • Identifying opportunities: Extreme levels of optimism or pessimism among investors might be used to identify possible mutual fund investment opportunities. Recognising differences between emotion and fundamentals can potentially allow investors to alter their portfolios appropriately according to prevailing market opportunities and inefficiencies.
  • Complementing fundamental research: Sentiment indicators complement standard fundamental research by offering extra information on investor expectations and market momentum. This comprehensive dual strategy can enable mutual fund investors to better manage their portfolios.
  • Real time reaction monitoring: Real-time sentiment analysis can allow investors to dynamically change their portfolios as required and stay aware of market trends, thus optimising the risk-reward potential of their investments.
  • Risk management: Market sentiment analysis for choosing mutual fund can be a useful technique for risk management. During times of high market volatility or uncertainty, investors may adapt their investing strategies to mitigate risks and lend relative stability to their portfolio by closely monitoring changes in market sentiment.

Key indicators used in market sentiment analysis to opt mutual fund schemes

  • The volatility index (VIX): The VIX, sometimes known as the ‘fear index’, analyses implied volatility based on options pricing. Unlike indicators that concentrate on current or previous mood, the VIX reflects expected market volatility.
  • High and low index: The High-Low Index is a basic but effective indicator of market sentiment that compares the number of equities that achieve 52-week highs against those that reach 52-week lows.
  • Moving averages: The 50-day and 200-day simple moving averages are indicators for analysing price movements in particular stocks or stock indices over a certain period.

Steps to incorporate market sentiment analysis in mutual fund decisions

  • Select sentiment indicators: Choose relevant sentiment indicators, such as VIX sentiment, moving average etc. to monitor market sentiment.
  • Analyse historical data: Collect and analyse historical sentiment data using statistical methods or sentiment analysis tools to identify trends and correlations with mutual fund performance.
  • Develop and monitor strategies: Develop investment strategies based on sentiment insights, back test them using historical data, and continuously monitor sentiment indicators to make informed decisions and adjust strategies as needed.

Market sentiment research gives insights into investor sentiment, analyses trend and patterns, evaluates market risk, and allows for real-time response monitoring.


Q. How does market sentiment impact mutual fund investment performance?
Market sentiment impacts mutual fund performance because it influences investors' perceptions and leads them to make decisions to buy or sell assets.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.