End Of Month Effect in NIFTY 50 – Turn of the Month Trends with Backtest Insights and Trading Rules

Our backtests suggest that NIFTY 50 has a positive end of month effect. A variation of the inputs does not change the result dramatically, thus the end of month effect seems reasonably robust.

The end of month effect is well documented in the US stock market, sometimes referred to as the turn of the month effect. In a previous article, we documented how you can turn this into a turn of the month trading strategy.

This article backtests to see if we can find the same end of month effect in NIFTY 50. The NIFTY 50 is the main Indian index and consists of the 50 largest Indian companies.

Key Takeaways

• NIFTY 50 shows a consistent end-of-month effect
• Strategy buys near end and exits early month
• Best entry around fifth or sixth last day
• Exit typically on second trading day
• Backtest shows higher returns than buy-and-hold
• Strategy works despite limited market exposure
• Results remain stable across parameter changes
• Some curve fitting present but effect still robust

(Admittedly, we have never traded Indian stocks or indices. We would like to, but meet regulatory restrictions, at least a couple of years back when we tried.)

Related reading: –MACD for NIFTY

Let’s backtest the end of month effect in NIFTY 50

We use data from Yahoo!finance. Unfortunately, the dataset starts in 2007, and thus our time frame is (perhaps) too short. Anyway, it gives an indication.

The turn of the month trading strategy we used to backtest US stocks had an exit at the close of the third trading day of the month. For this article, we did optimization of the exit and it turns out NIFTY 50 has the optimal exit at the close of the second trading day of the new month.

We emphasize that we in this article use trading days – not calendar days. They can be completely different.

But what is the best trading day to enter? Let’s make an optimization where we enter on the tenth last trading day and we continue entering up until the last trading day of the month (we exit at the close on the second trading day of the new month):

The first column shows that an entry on the fifth and sixth last trading days of the month are the best in terms of profit factor, but not in terms of average gains (as expected it pays off to hold a bit longer). However, the gains don’t vary so much, and thus we go for the best profit factor.

Let’s formulate a turn of the month trading strategy for the NIFTY 50:

Trading Rules

Let’s see how this performs if we invest 100 000 at the start and compound this amount until today:

The CAGR is 10.5% which is better than buy and hold even though we are only exposed to the market 30% of the time. Max drawdown is 26%.

Is this backtest curve fitted? Yes, to a certain degree it is.

However, by changing both the entry and exit just a few days we see that the result is reasonably robust. The profitability changes a little, but overall, we see a nice tailwind whenever we enter during the last ten days of the month.

All in all, we would say that NIFTY 50 has a positive end of the month effect.  This can hence be used as a turn of the month trading strategy.

FAQ:

Is the end-of-month effect in NIFTY 50 similar to the turn of the month effect observed in the US stock market?

Yes, the end-of-month effect in NIFTY 50 is comparable to the turn of the month effect observed in the US stock market. The article explores the historical data and backtests to identify and analyze this phenomenon.

How is the turn of the month trading strategy implemented in NIFTY 50?

The turn of the month trading strategy for NIFTY 50 involves going long at the close of the fifth last trading day of the month and selling at the close of the second trading day of the new month. This strategy aims to capitalize on the positive end-of-month effect.

How does the turn of the month trading strategy in NIFTY 50 perform based on the backtest results?

The backtest results indicate that the turn of the month trading strategy in NIFTY 50, where 100,000 is invested at the start and compounded until today, shows a Compound Annual Growth Rate (CAGR) of 10.5%. Despite being exposed to the market only 30% of the time, this strategy outperforms buy and hold, with a maximum drawdown of 26%.