The last one year has been one of the worst period for equity investors all over the world. They have collectively lost over US$ 1 trillion during this period. However, that said, since the market has crashed to a very low level, this is the most opportune time to enter it. What goes down has to come up.
Yes, the contrary is also true. What goes up has to come down. Eventually what matters is the cumulative effect of the extent of the up and the down movements. It is a universal truth that over long term, the markets keep going up. Technically, this phenomenon is known as ‘higher top higher bottom’.
For instance the Sensex was 100 in 1979 and now in 2019, after 40 years it is hovering around 37,000 – a compound rate of growth of 15.93% and this is almost tax-free if you take the precaution of keeping your long-term capital gains below the level of Rs. 1 lakh. The best strategy is to distribute your funds in fundamentally sound companies and do not withdraw unless you need the money or the soundness of the company gets irrevocably breached.
The common problem faced by one and all retail individuals is – I am a very busy person having an employment, profession, business and/or other activities which does not permit me to have the time and the energy to extract maximum wealth creation possibilities from my investible funds. This piece is directed to such persons.
Investing in shares is most rewarding and also most risky. The possibility of you losing your shirt (and sometimes more sensitive garments) cannot be lost sight of. The ‘risk’ happens to be the least understood and most misunderstood aspect by the retail investors.
As observed earlier, you must have a long-term view to bypass this risk totally. You must have the ability to locate fundamentally good companies or a consultant who can identify such companies for you. All the so called ‘expert advice’ doled out through daily papers and TV channels deals mostly with intra-day, short-term and the current-news.
How long is long-term? In our opinion long-term is life-long. Sell if and only if you need funds for your consumption or the fundamentals of the companies in which your investments are parked have changed dramatically because of macro and micro factors, government policies, mismanagement or scams.
It is important to keep track of these continuously and unless you have the capacity to do this yourself or have got a consultant who has such objectives. Agreed, it is difficult to locate such a consultant. The best you can do is to opt for good schemes of good mutual funds (MFs) which have a fleet of experts undertaking this job on your behalf.
MFs have evolved as the one and only parking place for your investments. However, there are problems — the main being that none of the fund houses appear to have long-term view. The other one is that there are 43 Mutual Funds offering 2599 schemes. Difficult for a retail investor to choose from.
Let us prune this number down to a comfortable size by taking following steps:
1. Debt-based Schemes: All MFs have different horses for different courses. For the risk averse, there are debt schemes. Even if a bulk of your investments are in such schemes, you will do well by choosing equity-based schemes (over 65% in equities) for a small portion of your funds.
2. Dividends: MFs are required to apply DDT @ 29.12% on dividends paid on non-equity based and 11.65% on equity based dividends. Do not go for dividend payout schemes. Opt for growth-based.
3. Sectoral and Thematic Schemes: Avoid such schemes unless their past performance (though not a guarantee for future) is super-excellent. Let the fund manager have a bigger field to choose from.
4. Schemes less than 3 year old: In spite of millions of rupees spent on the so called ‘investor education’, many investors at large are attracted by MF schemes at launch. The confusion arises from such new MF schemes being treated as equivalent to IPOs of stocks seeking to be listed, however, have no track record.
The main reason for the unbridled growth in the MF schemes is the fact that MFs (mostly in the past) took undue advantage of this confusion. The regulator has taken an excellent step by forcing the MFs to term these New Fund Offers (NFOs) and also further action by forcing the MFs to merge schemes having equivalent objective and yet the confusion prevails.
An already performing scheme has an additional advantage of demonstrated competence on its side. Though the offer documents of all MFs have the statutory warning that “past performance is no guarantee of future returns”, astute investors know that ignoring history in the financial markets is suicidal. Patrick Henry, one such astute and famous investor has said, “I know of no way of judging the future but by the past.”
Now the population of schemes to choose from has become comfortably manageable. All that you have to do is to select schemes which have given an yield of over, say 12% for, say the past 3 years. Finally, do not much worry about the highest or lowest amongst these. Because of the market being what it is, the top scheme may slip down and the bottom one may climb by several notches. Distribute your investible funds in around seven schemes.
1. If you are capable enough and have the time and energy to pick up the parking place for your investible funds and monitor it in an on-going basis, you should invest directly in shares. Why suffer the charges of the MFs?
2. Others may go in for Direct, if and only if they have the capacity, time and energy to pick up the scheme(s) best suited to their needs and goals.
3. The rest may opt for a consultant in the field. Here also they have to invest a little one-time effort to choose someone who earns his fees by working towards enhancing the wealth of his clients and not by mis-selling schemes which enhances his own wealth.
At End: The role of a doctor, particularly in healthcare, insurance and investment is extremely important to any individual. His role as a ‘secretary’ and after-sale service is precious. Unfortunately, SEBI, in its attempt to pass on higher returns to the investor has resulted in the agents leading their clients to a parallel product ‘ULIP’ of Life Insurers in spite of the MF products being superior and handled by experts in investment and not insurance.
In its misconceived attempt to benefit the investor at large, SEBI has possibly not only hurt him but also the MF industry largely. IRDA, the counterpart of SEBI for insurance, understandably was forced to reduce the commission to agents to a large extent.
Even this reduced commission is still quite large and the malaise of the kick back being given by agents still continues. However, the fact remains that this burden of commission has to be eventually borne by the policy holder.
The authors may be contacted at firstname.lastname@example.org