The last few months have tested the patience of investors investing in equity and fixed income, especially bonds. The double-digit returns in equity markets of the year 2017 looks like a distant past. Today, investors are confused. Every other day, there is a news about default in corporate paper by an entity, which is not inspiring confidence.
The period since January 2018 has seen volatility and downturn in majority of the stocks. And this has only created doubts in the mind of investors. But then, there were cycles of volatility, both as witnessed in 2017—when markets were moving up and in 2018 when they fell, especially mid and small cap stocks. Though the Sensex seemed to be more flat, the stocks which the investors have invested have only moved south. In this scenario, what is the approach an investor needs to have in place?
Revisit past returns
Let’s take a step back and revisit the decade till 2018. If we look at the categories of schemes of mutual funds over the period beginning January 2015 – till date, liquid funds as a category has delivered returns higher than most of the equity mutual funds.
Again, if the period of portfolio review was December 2017, equity fund categories were delivering annualised returns of over 15%. History is important to understand how returns have moved over multiple time periods. And the approach has to be based on the cash flow and liquidity needs. If an investor is looking for a cash outflow or withdrawal from the investments in less than 36 months, it would be prudent to stay away from equity as an asset class. The drawdown (even if they are on paper) can affect one’s investment journey process. So, it is important to have a plan and process in place.
The Sensex over the period of last four decades since 1979 has delivered an annualised return of over 16%.But then, it is point-to-point and when you look at point-to-point returns, volatility in the returns escapes the attention.
Only when the returns are looked at rolling periods, at intervals of, say, one year, one can understand how volatility is an investor’s friend in the investing journey.
New investors feel the pinch
Majority of the investors who have been investing in equity or in equity-related mutual funds in the past one to two years would have noticed that their portfolio is in red. Doubts would be creeping into the mind, on whether to exit and move to instruments of least or zero volatility. It is a valid thought. But then again, what it reflects is that at the time of investing, one did not look at the possibility of the portfolio going south.
And that is where the investing process needs to begin. One must have pre-set rules which can be used at times such as these, when one observes notional erosion of equity portfolio.
Also, one needs to respect history. The last decade had seen the equity markets moving up by more than three times in less than 18 months and then retreating by more than 50% in less than a year. The moves, both on the upside and downside were swift, which typically does not allow time to investors to contemplate on the action to be taken. And this is where the investing process rules helps in taking action.
The writer is managing partner, BellWether Advisors LLP