Dalal Street Investment Journal

Tips For Long Term Investors

It is a well known fact that equity has an important role to play in the portfolios of long-term investors. In fact, equity has long been recognized as potentially one of the best classes that can help them stay ahead of inflation and achieve their long-term investment goals. However, to benefit from the true potential of this wonderful asset class, investors must follow a disciplined approach, own a diversified portfolio and invest with a long-term view. That’s why mutual funds are considered to be an ideal way for retail investors to invest in equities. Unfortunately, only a small section of equity fund investors plan their investments and stay committed to their investment process for the committed period.

No wonder, despite being potentially the best asset class, the retail participation in equities, either directly or through mutual funds, has remained very low. Th e mistake investors make is that they shun equities totally when the markets are down but invest aggressively in the hope of generating quick returns when the markets are doing well. While staying away from equities during stock market downturns results in investors missing out on potentially great investment opportunities, investing aggressively during the rising market scenario exposes them to higher risk. As a result, investors get disillusioned and stay away from equities.

This trend is quite evident from the fact that mutual funds have been net buyers in equities only for two months during the period starting from January 2012 till date. Th e incessant redemption pressure from investors has resulted in mutual funds turning net sellers.

It is true that the stock market has been testing the patience and resolve of investors for more than five years. However, even the prolonged bouts of volatilities do not justify the haphazard investment approach. A disciplined approach would have allowed investors to keep faith in equities even during the market downturns. Investors can stay disciplined if they align their equity investments to their investment goals with a clearly defined time horizon.

It is important for every investor to know that volatility in the stock market is a natural phenomenon and hence he must be prepared to face it. Th e performance of equity funds over the last six months has proved that all those investors who stay disciplined by ignoring volatility get rewarded handsomely when the stock market turns upwards.

The tables below highlight how returns improved dramatically over the last six months for those investors who have been investing through SIP As is evident, there has been a marked improvement in the performance of these select funds over the last six months or so. For example, for a fund like HDFC Top 200 which was giving a negative annualized return of 2.79 per cent over a three year period in September 2013, the annualized return for the same duration improved to 14.41 per cent as on April 21, 2014.

Th erefore, if you are looking to start investing in equity funds, make sure you have a defi ned long-term time horizon and a commitment to follow the disciplined approach. Th is alone will go a long way in achieving your long-term goals.