There is never a dull moment in the wealth creation. First, you need to determine the rate at which the portfolio will grow and then look at the asset allocation. After that you have to look at the cash flow during the investment journey and need to cope with the volatility in various asset classes.
But how do you interpret the statement, when you are told that a particular asset class has delivered an average a return of 15%, with a standard deviation of 30%. What questions come to your mind?
When you look at the fact sheet of a mutual fund scheme, three sets of data on returns are mentioned– returns since inception, returns for each of the three preceding years and benchmark return. These data show the investor the returns at varying time periods and also the performance of the schemes in comparison with the benchmark as followed by the schemes.
The Portfolio Management Scheme also gives similar information. Have you at any point of time noticed that the returns as displayed by the mutual fund schemes and the returns as recorded and displayed by your portfolio are not in sync? The answer is simple – investment return viz-a—viz investor return.
More times than not, you as an investor invest in a scheme after the scheme has generated great returns as compared to the benchmark returns or its peers return. Your investment was never a part of the journey of the scheme when it had started to generate the returns. You entered the scheme, only after it generated the returns, so the best (till now) has been generated.
If this is not case, then most probably, you pulled out the scheme at the first instance of under-performance. At the time of redemption, what you need to consider whether the overall portfolio is under-performing or the stock selection of the fund manager gone bad or was it the economic down trend or within asset class mis-allocation. Only looking at the return generator is a definite recipe for failure and not success.
What has just been said is that your time in the scheme is the key factor in ensuring that the schemes returns and your investment return in the scheme is similar or it’s the same (do understand there is a difference between similar and same). Timing the entry to perfection is a matter of pure luck and chance and one should desist from it. If the investment is only tactical, does this aspect come in play.
Data about the returns over multiple time horizons are regularly flashed all across. It puts forth the returns that has been generated by the investors. In reality, it’s the returns which has been generated by the scheme, as investors, more times than not, do not stay invested across all time frames. So do not get lured by this data.
What is more important is where have you been invested and have you generated the returns. Less is more- is the mantra to be adopted. This is in context of the number of schemes you should have in the portfolio of wealth creation.
The returns generated by your investment is what matters. So, you need to be invested for multiple time horizons to generate the returns as delivered by the mutual fund schemes. The rolling stone gathers no moss, is apt in the investing theme too. Too much of chopping and changing and investing in the flavour of the season scheme is a guaranteed way to generate sub-optimal return.
Keep it simple. Understand why you are investing along with reasons for investing will ensure that the portfolio is monitored and the weeds are removed. This will go a long way in ensuring that the variance between your returns as an investor and the investment returns as generated by the schemes are kept to a minimal.
The writer is founder& managing partner of BellWether Advisors LLP