It’s been a trying time for long-term investors. September turned out to be horrible, with the benchmark indices falling by more than 6% in just 30 days. October hasn’t been any different with markets losing 5% in mere four trading sessions. Naturally, equity-linked mutual funds performance resembles a bloodbath. Actually ever since January, markets have been nervous. Then, the LTCG tax imposition was announced. Midcap and smallcap valuations surged, but they corrected in a big way in recent months.
Only certain large-cap stocks have shielded investors from losses. A weak rupee and rising oil price has further complicated the situation, as investors grapple with the possibility of the outcome of next general elections not being simple. In short, retail MF investors are being tested. Those Warren Buffett’s quotes are not just words, they are proving to be a real-life experience. So, what should you do?
The MF performance scorecard is not pretty. Out of the 350 equity funds, excluding sector focussed schemes, close to 300 are giving negative returns in the year to date period. Fund-houses can always argue that investors may be getting impatient after 3-4 years of good returns, but it is investors’ money. They have a right to be disappointed if their investments have, even notionally, lost in absolute terms. The return picture does not change in a big way even if you look at the last 12 months.
For long-term investors who are worried about one year or year to date returns, there is a quick fix. Stop looking at daily or monthly returns. Review your fund investments only twice a year and try to understand the overall market scenario. There are no active pure-equity fund managers who can give you positive returns consistently at a time when financial markets have dropped sharply. The overall market direction is important. So, buy investments for your long-term goals and then stop looking. In fact, there are many investors who simply forget their investments.
Dementia when it comes to investments is good. It allows you to stop worrying about the intermittent movement until you reach the end of your investment horizon. However, that is a tough call today because of the easy display of NAV, regular emails and SMSes about investment details and their market value. Once you invest, it is better to forget about it for 3-5 years.
The investment return in assets like stocks are not a straight line. There will be ups and downs.
Another smart way to shield yourself from swings in portfolio value is asset allocation. Sit down with your financial advisor and make an investment plan that is anchored to asset allocation principles. Remember, no particular mutual fund scheme or investment strategy will out-perform in all conditions. That’s why a portfolio with diversified styles is required. Don’t construct a portfolio based on recent performance or based on a bull market. The answer to such problems is in two words: asset allocation.
We know you may have heard about ‘asset allocation’ earlier. However, asset allocation is a powerful tool that investors do not seem to employ. Ordinary investors will always have a tough time arriving at the magic number or re-balancing their portfolios. But that’s what you should do generally at all times. If you can’t do it alone, employ an expert to do it.
Re-balancing of a portfolio and adjusting the asset mix as per the defined asset allocation plan is a simple thing to do. Today, you have access to asset allocation funds which do this. So, one does not need to be a finance wizard to do asset allocation. By following certain models, which are generally based on the Nifty 50’s price-to-earnings ratio, funds determine their asset allocations. In doing so, they try to avoid pricey markets by raising their debt allocation. They will raise the equity portion when stock markets are undervalued.
So, please look at your investment portfolio through the asset allocation mix. If you can do re-balancing on your own, that’s a plus. Look at the equity, debt, gold and cash mix today. If equities have corrected, the asset mix will be quite different from what it was at the beginning of the year. So, take necessary action. Once you follow an asset allocation model, up and down moves in the market do not matter much.