The Hindu Business Line : Longer term - the best bet on equities

IT is not easy to find loyalty in the quirky world of mutual funds. Investors, driven by sentiments that are often extremely short-term in nature, are rarely loyal to the funds in which they have invested. They are essentially restless and fearful in nature, willing to get out at the first sign of uncertainty.

There is no denying that the equity market in India is currently passing through very uncertain times. There is no clear direction, sentiments are depressed in many quarters and marketmen are generally waiting for the Budget to arrive.

Such uncertainty is particularly unnerving for the ordinary investors who wish to dabble in equities. Those who plan to enter equity funds at this stage do not know for sure as to which funds will be most appropriate for their needs.

The `best' fund for Investor A is not necessarily the most suitable one for Investor B. Chances are that the two will differ in many ways. Their risk profiles may not match and their requirements may be completely dissimilar. An investor may choose his funds on the basis of certain well-known parameters.

As every one knows, past performance is often cited as the No. 1 factor that helps an investor to choose. This, despite the clichéd saying that past performance may or may not be sustained in future.

Evidence (based on a recently-published study covering 25 years) clearly seems to be in favour of longer term commitment to equities. The study, which deals with the period between March 1979 and March 2004, dwells on the returns on investments made in the 30-share BSE Sensex over various time periods. Investors staying committed for only one year had the highest chances of losing money in ten out of 25 years actually! In comparison, those who had stayed put for 15 years did not record a loss in any of the periods.

The study also underlines another important point: The range of returns (the difference between maximum and minimum returns) keeps coming down with the increase in the time horizon. In other words, though equities tend to be quite volatile in the short-term, the volatility seems to even out in the long run.

Yet another review, one that deals with the period between April 1985 and March 2002, suggests that if you had invested in the Sensex all through these 17 years, you would have ended up with a return of 16.39 per cent. If, however, you had missed the best ten days during this 17-year stretch, your returns would have fallen to 9.65 per cent. And, worse still, you would have gone home with a mere 0.51 per cent if you missed the best 40 days!

The message here is simple: Do not try to time the market.

Whatever these studies say, it is still difficult for many investors to keep their money locked in for long durations. Most people are swayed by fear and anxiety. And small investors are the first to shy away from the market.

Fund houses, despite their best intentions, find it extremely tough to retain such investors. The latter, therefore, should be told in no uncertain terms that they need to make one-time allocations for decent lengths of time. Besides, it is not necessary to move in and out at the slightest fluctuations.

Significantly, there is a need to invest regularly. Most fund houses allow regular - even quarterly and monthly investments - in their diversified growth products.

Feedback may be sent to blcal@vsnl.net

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