Due weightage must be given to asset allocation and time horizon to tide over volatility in the stock markets.
As we enter 2019, what has been the returns for investors, especially in stock markets in this calendar year? As of December 23, 2018, the YTD returns in the Sensex has been around 4.95%. This is after the Sensex went south in the months of September and October by over 11%.
The Sensex moves on many factors, many of which are related to economic growth projections, regulatory environment, political situation – both national and international, global trade policy and not to forget the perceptions of all the above matters by the investors.
And in this year, in particular, we have had both headwinds and tailwinds effecting us and this caused volatility to be main factor in the investment process.
Volatality cannot be predicted
In the beginning of the year, investors were all bullish with the equity asset class scaled new heights. The budget of 2018 was a highly anticipated one, mainly for the reason whether Long Term Capital Gains ( LTCG) on equity, will be re-introduced. It did happen and the Sensex after touching a high of 36,443 levels, declined by over 10% by the end of March 2018.
And this was only the beginning. The small cap and the midcap index fell more steeply and there was a feeling of regret and missing out by the investors. The question being asked was – Why did I not sell when the Sensex was climbing? But then, it was ‘greed’ playing along, and there was a different fear- fear of missing the highs.
During the same time, Securities and Exchange Board of India (Sebi) had also come out with the mutual fund schemes recategorisation to standardize the attributes of mutual fund schemes across the categories and make the investment information easier for decision making for the investor.
As a result, the fund managers also had to revisit the portfolios, to be inline with the Sebi mandate. And across the stocks, be it small-cap or mid-cap, had to bear the brunt. And the beneficiary was the large-cap funds. This looks good in hindsight. But, when the exercise was being carried out, in real time, the investors had little clue.
Performance of fixed income
And how did fixed Income instruments perform? The top performing liquid fund schemes , dynamic bond schemes, short term bond schemes in general, the fixed income schemes have delivered returns around 7-7.5%. The gold prices for the year 2018 also moved up by over 7%.
This is why it becomes very important that investing needs to be considered as a process and a journey , and not a destination , by itself.
Need to consider that the asset allocation and time horizon is accorded its due weightage in the investing process. If you have invested in the earlier part of the year, with ‘returns’ as the only criteria, in majority of the cases, as an investor you would have come to grief and the portfolio being in ‘red’.
Lets look at the annualised three-year return as of 2018 in excess of 11%. This begets what were the returns for the years – 2017 and 2016 – 8.28% and 8.94%, respectively.
The calendar year returns of 2014 and 2017 were 30% and 28%, respectively. The outlier years. And equity returns are never in a straight line. There will be outlier years and there will be a single digit return years and maybe even negative year of returns. That’s what the past data is telling.
This too shall pass and what is important is having your investment strategy in place to deal with the volatility. And what better way to learn from the mistakes and apply the learnings in the new year to come.
(The writer is managing partner, BellWether Advisors LLP)