The Hindu Business Line : Five-year returns dwindle

The sharp correction witnessed thus far in 2008 would have sent the portfolio of many a ‘recent investor’ plummeting into the red. True, the return scenario for long-term investors of, say, at least five years may appear a lot more comforting.

However, the disappointing news for such investors is that they may have lost out a good part of the whopping long-term returns they had earned in paper, owing to the market correction during the last nine months.

The five-year return picture of diversified mutual funds has been drastically altered by the protracted volatility from January 2008 to date. We analysed the five-year return chart of diversified equity funds as of December 2007 and September 2008 (see table) to understand the impact of correction.

The following are the observations:

Average returns shrink: The average five-year return for diversified equity funds has dwindled to 27 per cent as of Sep 30 as against 53 per cent in December 2007. The performance, however, remains superior to the Sensex for similar periods. Top funds such as Reliance Growth and Magnum Contra with 5-year annual returns of over 70 per cent as of December saw returns shrink to about 40 per cent in September.

Fund ranking: The top ten funds in the five-year category have, by and large, remained the same, although they have shifted places in terms of rankings. However, a few relative underperformers such as Franklin India Prima., Reliance Vision and Birla Sunlife Basic Industries have given way to improved performers such as Kotak 30, and DSP ML Equity. Clearly the underperformance of mid-cap stocks and relatively less downside risks offered by large-caps have resulted in the change.

Not much downside protection: The top funds in the five-year charts have, however, shed much of their NAV values during the corrective period. In other words, those that shed far less value turn out to be funds that had all along been underperformers in a bull market.

For instance, funds such as UTI MNC and ING Core Equity lost less than a large number of the top five-year performers. They, however, continue to occupy the last quartile in the performance chart. A few takeaways also emerge from the above data. For one, setting target returns and periodic profit-booking are key to an optimal long-term investment strategy.

Mid-cap funds require periodic profit-booking as their decline is sharper and swifter. The ability of mediocre funds to contain downside better need not necessarily point to better performance. The fund’s track record over both bull and bear markets may have to be analysed.

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