Mutual Funds

Your Fund Portfolio

Parvatha Vardhini C | Updated on July 19, 2020

I am a 46-year-old self-employed professional. I started investing in mutual funds in 2008, as lump sums and through the SIP route, and plan to continue till 60 years of age. The annualised return from present investment is around 7.5 per cent. I made a comparison chart of equity and debt funds regarding the return of investments through the SIP route for the past seven years and realised that only 4-5 equity schemes could generate more than 8-9 per cent, which is comparable to the returns of short-term debt funds. If so, what’s the point in investing in these risky equity schemes on a long-term basis? So, should I start SIPs in good short-term/dynamic funds or continue investing in equity schemes, but book profit as and when the annualised return crosses 12 per cent? Please suggest.

Dr Bindu

Your observation on the performance of SIPs in equity funds is true. For instance, today, if you take into consideration a five-year period, only about 5 per cent of the large-cap funds have generated a SIP return of above 8 per cent.

Multi-cap funds also sport a similar performance — only about 7 per cent of the multi-cap funds have scored over 8 per cent SIP returns in the last five years.

And yes, SIP returns of many short-duration and dynamic bond funds hover around 8-9 per cent for the said period.

Since we do not have information on what categories of equity funds you have exposure to, we have illustrated with large- and multi-cap funds, as they are suitable for investors with a moderate appetite for risk.

You have raised this question at a point when the market has corrected and, hence, returns on equity funds have lost some sheen. Currently, over one-, three- , five- and 10-year periods, the broader market represented by the Nifty 500 index sports an annualised return of minus 7 per cent, 1.7 per cent, 5.4 per cent and 8.2 per cent, respectively.

Just before the market fall began on February 20, the returns over these periods were much higher at 2.3 per cent, 6 per cent, 6.2 per cent and 11 per cent, respectively.

Take note that while 5-7 years is not a short period for investing in equity funds, it is not too long either. If you push up the time horizon to 15 years, for instance, over 70 per cent of both large- and multi-cap funds sport SIP returns of more than 8 per cent.

SIPs in almost half the multi-cap funds have posted double-digit returns in a 15-year period, while SIPs in 10 per cent of the large-cap funds have clocked double-digit returns over 15-years.

So, what is the takeaway from this? If you start early, continue your SIPs through market ups and downs and invest for the long term — equity mutual funds have the potential to deliver superior returns provided you choose the right funds.

However, it is important to book profits closer to your goal. In your case, if you reach your targeted portfolio returns (annualised) of 12 per cent, say, one or two years before you turn 60, you can move the sums to safer avenues so that your corpus does not get impacted by any market downturn closer to your encashment date.

The 12 per cent return assumption is a good one if we assume 6 per cent risk-free rate (yield on 10-year government securities) and 4 per cent inflation rate (RBI’s target of 4 +/-2 per cent).

You started investing in 2008 and have 10-15 years to go before you turn 60. Hence, you need not panic now. In the absence of details regarding your portfolio, we are not able to comment on your fund holdings and whether any course correction is needed.

The performance gap between actively managed large-cap funds and passively managed index funds is narrowing. So, if you have large-cap funds in your portfolio, replacing some of them with index funds could help lower the cost as well as the risk quotient.

Equity and debt are two different asset classes that outperform each other at different points in time — hence, the need for asset allocation.

You can also invest in debt funds to add to your corpus. Keep in mind that debt funds are also subject to risks such as interest-rate risk and credit risk.

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Published on July 19, 2020

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