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Equity funds: Invest for the long haul

Dec 24, 2001

Equity funds arenít for punting. They are for long term investors, or to put it differently, they are meant for long term investing, but are rarely treated that way. If past trends are any indication, investors in equity funds need to change their investment perspective drastically. They need to be less fickle and more committed. To strike a similitude, they need to treat equity fund investments like a long-term relationship, rather than short-term fling.

Monthly mutual fund figures released by AMFI (Association of Mutual Funds in India), the representative body of Indian mutual fund houses, often reveal that inflows/outflows in equity funds fluctuate dramatically. And mostly its to do with a rise/fall in equity markets. So when equity markets witness a tumult, we have investors redeeming their equity funds, partly or entirely. Likewise, if there is a surge in equity markets, investors take to equity funds in large numbers.

There is probably a misconception in the minds of investors about equities and equity funds. Both these are distinct investment avenues although they serve the same purpose Ė generating wealth for investors. However, investors need to take note of some stark differences between the two:

  • While equities may unfortunately become a target for punters, equity funds simply donít work that way and should not be perceived as such by equity fund investors. This means you canít punt with an equity fund, you have to necessarily invest. In any case, the loads (entry/exit) will ensure you make nothing by Ďpuntingí.

  • A particular stock may witness a strong surge, clocking a yearís growth in a single week or month. But equity funds have a group of stocks and the growth (as also the decline) is on the conservative side.

  • As a corollary of the above, investors in equity funds need to be a lot more patient than stock investors. Both these avenues can generate wealth for investors, but more often than not, its over the long term. Over the short term, equities and equity funds can erode wealth devastatingly.

GROWTH†FUNDS NAV (Rs) 1-YR 3-YR 5-YR INCEP.
BSE Sensex - -19.2% 4.3% -2.8% -
S&P CNX Nifty - -17.6% 11.0% -0.1% -
ALLIANCE EQUITY G 23.4 -35.3% 28.4% 36.6% 27.7%
PIONEER ITI BLUE G 19.1 -18.6% 28.6% 30.7% 21.7%
ZURICH I EQUITY G 17.9 -5.4% 26.0% 27.4% 9.7%
PIONEER PRIMA PL G 19.8 -10.3% 27.3% 25.9% 11.3%
BIRLA ADVANTAGE 23.2 -30.7% 19.4% 24.6% 17.5%
PIONEER PRIMA FUND G 19.8 -4.0% 20.2% 15.4% 9.0%
ZURICH I 200 G 13.6 -9.6% 9.0% 11.6% -11.4%
MAGNUM EQUITY 8.0 -38.6% 6.8% 5.8% 7.8%
TEMPLETON GROWTH G 11.5 -8.6% 21.9% 4.7% 5.0%
PRU ICICI GRTH G 17.4 -19.1% 19.2% - 16.6%
SUNDARAM GROWTH 11.0 -18.2% 12.4% - 10.4%
DSP ML EQUITY 12.6 -26.9% 8.2% - 10.7%
HDFC GROWTH G 7.3 -25.7% - - -22.5%
(Returns over 1-year are annualised)

There needs to be more purpose and thinking while investing in an equity fund. In India, stocks have had such a pervading existence, that its negatives have rubbed off on equity fund investors. So like stocks, investors expect their fund investments to appreciate dramatically and they donít want to be with a fund for too long before they move on. Thatís not a smart thing to do even with equities, let alone equity funds.

Investors need to understand and follow a few important tips when it comes to investing in equity funds.

  • Take a long-term view before entering an equity fund, really long. Unfortunately in India, long term is taken as 12 months at the most. Actually it needs to be a lot more than that, something like 36 months, 48 months or even more.

  • Obviously if you are interested in the long haul, you have to be with a fund that has proven its credentials over that investment horizon. So choose the fund that has a 3-year history at least, and has the performance to back its claims. In India, there are few funds that fit this profile, but thatís okay. Time is a good test for any fund, and its also how the men are separated from the boys.

  • Donít look for and expect your funds to be in the top quartile, month on month, year on year. Thatís not possible. Fund managers are human and err. Stick with the ones who have erred least. Thatís where the test of time will redeem the fund manager.

  • Donít put all your money in one fund. Diversification is the name of the game. Invest across funds Ė an aggressive fund (with a growth strategy) along with a conservative fund (value strategy), should ideally be a part of your portfolio. (However, make sure, the funds arenít holding the same stocks.).

  • Donít invest all your money at once. Invest in portions, at every fall. Be brave, a fall in equity markets isnít adversity, its an opportunity, and you must grab it with both your hands. Donít ever make the classic mistake of buying high and selling low. As you grow older, you must grow wiser.

As investors may have realized bravery, steadfastness and patience are important virtues for the equity fund investor. Donít let the market sentiment affect you. Thatís for the punters. You ought to remain unaffected by whatís happening in the markets. Let your fund manager worry about that. Its his job and he is being paid a lot of money so that you can live peacefully without worrying about your investments everyday. Thatís the smart way to invest and reap the benefits over the long haul.

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