Mutual Fund - A Tool for Wealth Creation
Author: Dr. Renu Pothen, Research Head, Fundsupermart.com India
This article was published in Moneycontrol.com on Saturday, 01 December 2012
I had written an article in moneycontrol.com sometime back on the benefits of investing in mutual funds for a long time period. Since then, I have received interesting feedback from investors saying that instead of wasting my time recommending investments in mutual funds for a long time, I should rather find strategies which will help them in making a quick buck in a short time. This disappointment in investors’ tone can be traced to the fact that over the last 3-5 years, the market indices have been range bound and have delivered returns in the range of -0.34% to 4%. A very interesting suggestion that came up during these discussions was in this time of severe volatility it would make better sense if experts could actually time the markets. Here I am talking about the same old strategy of “buying low and selling high”. In the mutual fund context it would mean selling a particular equity fund when markets are at the peak and parking the surplus in an ultra short term fund while waiting for a crash to replough the same into the equity fund. Hence, this column outlines my responses to the opinions expressed.
I am in sync with investors when they say that markets have not delivered during the last 5 years. However, the point that they are missing here is what they would have got if they had trusted their money with fund managers in the mutual fund industry. Here I am referring to the actively managed diversified funds some of which have actually managed to beat the market indices by a wide margin over the last 5 years. The numbers are here in front of everyone to see. For instance, if an investor had invested INR 1,00,000 into 4 funds, namely, Franklin India Bluechip Fund, IDFC Premier Equity Fund, HDFC Mid-Cap Opportunities Fund and Franklin India Index Fund-BSE Sensex Plan on November 23, 2007, then the accumulated corpus would have become INR 1,24,964, INR 1,63,808, INR 1,52,983 and INR 99,773 respectively. Hence, these figures are a clear indication that our actively managed funds can fare better than the indices over a long time frame. I am of the view that instead of taking a holistic view on how the markets have performed, investors should zero in on particulars of the different investment options that they are planning to take an exposure.
As for the second suggestion that came up regarding the timing of the markets, on the periphery, I would like to remind our investors that we are dealing with a market which can catch a cold when some Scandinavian country sneezes. Theoretically, it might seem to be a very nice idea if all of us can actually predict the peaks and dips; however on all practical grounds it seems to be an impossible task even for experts.
In the mutual fund space, the maximum volatility is usually witnessed in mid and small cap funds along with those funds which focus on sector plays. While many investors are of the view that they can enter and exit these funds to maximize returns, there are sufficient counterexamples where they would have gained much more if they held for a long time frame.
For instance, let us consider the year 2011 when the mid and small cap funds were not the flavor of the season. If an investor had acted on our advice to buy midcap funds and had invested INR 1,00,000 in HDFC Mid-Cap Opportunities Fund on Jan 7, 2011, then the corpus as on Dec 21, 2011 would have been INR 84,050. On the contrary if the investor had decided to enter the market on Jan 7, 2011 and subsequently carried out a switch into HDFC Cash Management Fund-Treasury Advantage Plan on Feb 3, 2011 when the market was up by 359 points the corpus would have become INR 95,711 by Dec 21, 2011. This is with the assumption that the investor diligently continued with the switch transaction until December 2011. Now let’s move on to the year 2012, when midcaps have been on a roll, then a lump sum investment of INR 1,00,000 as on Jan 30, 2012 into the same fund would have yielded INR 1,20,555. On the other hand, a trading strategy in the same fund would have resulted in a corpus of INR 1,17,999 as on Nov 26, 2012. In this context, I would like to warn my readers that like all economic theories which are based on the ceteris paribus assumption, I have not considered the exit load and the taxation that will be applicable if investors move out from the equity funds in less than a year.
To conclude, investors who park their surplus into mutual funds should consider this option as a wealth creation tool and not get drawn by the sudden upward spikes in the markets. In this context, I would advise investors to create an appropriate portfolio based on their risk profile which will have funds managed by an efficient fund management team with a good track record. Hence, investors should just go about their daily routine with the conviction that their hard earned savings are in safe hands, while the fund manager and his team bear the tension of creating wealth for their investors.