Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Forget A Blissful Retirement If You Invest In Mid & Small Caps Now... - Outside View by PersonalFN
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Forget A Blissful Retirement If You Invest In Mid & Small Caps Now...
Apr 7, 2017

"Buy in a panic, exit (or sell) in a euphoria", is the guru mantra of investing in equities.

But unfortunately, retail investors tend to do just the opposite. They buy during exuberant times, and sell when the market (S&P BSE Sensex or the CNX Nifty) is falling like nine pins. As a result, they often lose their hard-earned money.

Recently, a media report highlighted how retirees insist on investing in small and mid-cap schemes. Lured by the extraordinary returns projected, they ask their advisors to shift their investment from debt and balanced funds to mid and small-cap funds. But, this can turn into a financial disaster for retirees.

So, what's driving retired investors to these high-risk assets?

Firstly, the immensely low interest on variety of fixed income instrument: bank fixed deposit, NSC, KVP, and even PPF. Bond yields are around 6-7%. So, retired investors are clearly in search of higher returns.

Secondly, they are following the herd. A next-door neighbour or family member or friend invests in equity mutual funds-they hear them brag about bountiful gains made-and so they too crave to invest.

But the point they're missing is, while equities offer potentially higher returns, the risk is proportionately higher too, particularly in the mid-and-small space. A fact is: most retirees aren't equipped to deal with this level of risk.

If you're a retiree, psychological traps and misconceptions may turn a blissful retirement into a nightmare.

Some interesting findings...

DALBAR, a US-based financial services market research firm, over the past 20 years, has measured the effects of investor decisions to buy, sell, and switch in and out of US mutual funds over short and long-term timeframes.

They find that the average investor earns less - in many cases, much less than the market.

They state that over the past 20 years, equity mutual fund investors have seldom managed to stay invested for more than 4 years. This short-term retention does not adhere to a prudent, long-term strategy, and is likely the result of short-term thinking and market timing. And here's how the average equity-fund investors have fared vis-a-vis the S&P 500 as the benchmark...

Consistent Underperformance of Equity Fund Investors

Their analysis throws up some interesting insights. They find that mutual fund flows coincided with the market direction. This means that when the market moved up, equity fund inflows increased and vice-versa. But the above chart proves that timing the market, especially while investing in mutual funds can be futile -and even hazardous to your wealth and health.

Now while the average investor-return data is not readily available for India, here's an interesting chart that throws light on investor behaviour...

Strong Inflows In Bull Markets

The chart above reveals, Indian investors have shown a tendency to rush in to invest in equity mutual funds when the market is on a bull run. This is clearly visible in the periods between 2003 and 2008, and then again post-2014.

However, the moment equity markets begin to struggle, as seen between 2009 and 2013, investors turn weary of investing in equity and begin to withdraw their investments.

So, will equity mutual funds suffer another exodus the moment markets correct? Well, only time will tell. However, based on the past trends of the market, it may be very likely.

Investors lack patience.

You see, it's harmful for your financial health to invest based on the whims and fancies of the market.

Low Average Holding Period

From the above chart, it can be concluded that on an average, only 38% of the equity assets are held for periods greater than two years. While the holding period is longer than that of non-equity funds, it is still less than the ideal holding period for equity assets. About 40% of the equity assets are held for less than a year.

Where is the Indian equity market headed?

PersonalFN believes an upswing in the market will pause, eventually. Valuations are looking expensive on a trail earning basis. There is a flush of liquidity from foreign investors, but markets would soon track routine events such as corporate earnings, industrial growth numbers, inflation data, RBI monetary policies, and so on. The market will support the high valuations only if corporate earnings and industrial growth are encouraging. Inflation and the RBI monetary policy should be conducive for this growth.

What should be your investment strategy?

PersonalFN is of the view that, before putting money in equities directly or through mutual funds, you should be sure that you don't need that money for the next five years. You should not to get carried away by the current market rally getting stronger by the day.

More than getting your timing right, PersonalFN recommends, concentrating on the right asset allocation. Invest with a financial plan in place - that can enable you to accomplish your financial goals. Avoid making ad hoc investments or it could turn out to be detrimental to your financial health.

There are several benefits of investing as per your risk profile and personalised asset allocation. This knowledge is essential for you to succeed in achieving all your financial goals. You don't need to go anywhere to gain this knowledge, you can get it right here sitting at your desk or in the comfort of your home.

Sign up for PersonalFN's comprehensive A to Z e-course to become your own financial planner. This video e-Course is geared to serve as a guide in your most serious decisions regarding money matters.

In Module #2, our video tutorials will explain how to set SMART goals. While in Module #4, we will talk about how to select winning mutual funds, along with the right asset allocation and its importance. The module will also outline strategies to build your optimum investment portfolio and much more.

We have put decades of our knowledge and experience in handling financial dilemma of a regular investor into this e-Course. Don't miss this opportunity. Subscribe to the e-course now!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Forget A Blissful Retirement If You Invest In Mid & Small Caps Now...". Click here!


More Views on News

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

How To Read Your Mutual Fund Account Statement Correctly (Outside View)

Aug 17, 2017

PersonalFN simplifies the mutual fund account statement for you.

This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

Aug 17, 2017

A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

Aug 17, 2017

Mr Trump is in the White House and the gods are in their heavens; what's not to like?

Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

Aug 16, 2017

All across the country, the old gods become devils. New, gluten-free gods take their places...

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

Aug 4, 2017

The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Aug 17, 2017 (Close)