Investing with a strategy in place and looking at the big picture is more important than tracking the Sensex and market returns on a daily basis.
Mutual funds investments have come a long way in the country. Starting with just one AMC, UTI Mutual Fund, in 2003, today there are 37 fund houses with the investing habit truly entrenched in urban India and gradually gaining ground in tier 2 and 3 cities.
The shift towards financial assets from real assets such as real estate, land and gold is reflected in the ever-increasing fund flow into mutual funds through systematic investment plans (SIP) and lump-sum investments.
However, with every fall in stock markets, investors start to panic and there are enough naysayers and pessimists who paint a bleak picture about the markets and economy in general.
Distinguish between trading, investing
This is where one needs to distinguish between investing, trading and goal-based investing through asset allocation. When you invest in real assets such as a house or land, you are willing to stay invested in them across cycles.
For an investor who had invested in property in the late nineties and early 2000s, there were occasions when the value of the investment was below the cost price. Investors wore a worried look, but did not sell the real assets. They held on and then the property boom happened which went on till 2013. As a real estate investor, if you can think long term, multi-decade investing, then what stops you to use the same (not similar) mindset, while investing in equity as an asset class.
Is it because at the touch of a click you can take a decision regarding financial assets? And it takes a lot of physical effort and multiple documentation when it comes to selling real assets? Returns from mutual funds The annualised returns since inception of a few of the equity schemes in mutual funds, which were first started in the early nineties, has varied from 15% to 20%. Now the question to be asked is how many investors remained in the scheme since inception?
Not surprisingly, very few. What it indicates is that investment return and investor return are very rarely aligned and similar. And this proves that as investors, we are aligned mentally towards activity. And we confuse activity with action. Action is required. Moreover, inactivity is also an action as long as one knows why one is being ‘inactive’.
Growth in equity returns are never linear and secular. If the returns generated in 2017 was over 25%, the returns generated in 2018 till date is less than 2%.
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If you have been investing since early or mid 2018, the portfolio return could be in red. And if you have been investing since 2017, after seeing the highs, the portfolio will still be in green, but way off the highs. Disappointment, either way. As an investor, one needs to ask the right questions. So, the question to be asked here is: Has the investment methodology and the asset allocation process been adhered to? If so, the movements in prices of stocks and the schemes should not worry or disappoint you. But then, adopting this mindset is difficult to begin with. However, adopt you must.
The biggest enemy of the investor is not the markets or the government policies or the advisor who recommends the schemes or the portal with its ratings. It is the investor himself. A 10-20% dip in the portfolio and many are are looking at stopping their SIP or redeeming the investments. Why? Now flip it the other way.
In 2017, as the markets were rising, you wanted to invest lump-sums and increase your SIPs. And this when you wanted to buy at every high. Today, when the markets are doing the opposite, you are despondent and want to exit. Think again.
The 10-year annualised returns in the Sensex Diwali-to-Diwali (2008-2018) has been 14% after all the ups and downs of the markets. Investing with a strategy in place and looking at the big picture is more important than tracking the Sensex and market returns on a daily basis.
The writer is managing partner, BellWether Advisors LLP