What Is January Effect

What Is January Effect

Investors in Indian Stock markets would have seen markets correcting big time in December and then witnessed Sensex crossing 61,000 points in the first two weeks of January. However, the markets corrected again this week. Further, small-cap stocks generated maximum returns compared to large-cap stocks in January.

Long-term investors call this phenomenon the “January effect.” In the last five years, my portfolio returns in January always exceeded the other months. When i dig in to find out the reason for this anomaly, i find two reasons for this jump:

1)FIIs resort to tax-loss selling on December stocks to minimise their capital gains, thus decreasing stock prices. Then in January, they buy back the same stocks, resulting in high returns.

2)As the FII’s buy-to-sell ratio falls in December and peaks in January, the differential return inflates.

Thus, investors who have purchased stocks in December would witness significant appreciation in their portfolios during January. It is also a reasonable way to make a quick profit.