Why Invest In Equity Funds?

The equity markets have been testing the patience and resolve of even the most hardcore investors. Needless to say, not-so-experienced investors are finding it extremely difficult to tackle these bouts of extreme volatility in the stock market. In times like these, investors often face the dilemma of whether to make fresh investments or not. Even those investors who have been investing in diversified investment vehicles like equity funds through SIPs do not feel quite sure about continuing their investment process.

However all those investors who may be contemplating the idea of abandoning a disciplined approach to investing now will do well to remember that any abrupt decision can have a serious negative impact on the prospects of their long-term portfolio and jeopardise their financial future.

If you are facing any such dilemma, it’s time for you to recall the reasons for which you have been investing in equity funds. It is a well known fact that equities as an asset class has the potential to perform better than other financial assets in the long run. However, to benefit from the true potential of this asset class, you must invest with a clearly defined time horizon, select the right kind of funds and avoid timing the market. In other words, you need to consider two important aspects while investing in equity funds, i.e. long-term investment and systematic investment.

Any one-off investments that you may make, irrespective of the market level, will be tantamount to timing the market. In fact, timing the market is a strategy that even the most experienced of investors find it difficult to practice on a consistent basis. Therefore, if you had begun investing in equity funds to achieve important investment goals like retirement planning, children’s education or wedding, you must carry on with your investment process. Bear in mind that poor performance during the short and/or medium term by an asset class that has the potential to do very well over the longer term should not be the reason for abandoning it. In fact, for a disciplined investor, the current market-like situations provide an opportunity to invest at much lower NAVs, which can bring the average cost down.

Many equity fund investors are disturbed about the fact that they have hardly made any returns on their investments over the last few years. In fact, the returns are negative for investors who had made a lump sum investment in 2007 and 2008 and didn’t follow it up with regular investments. However, the picture would be a little different for those who followed a strategy of combining the lump sum investment with regular investments.

As an equity fund investor, you must remember that your portfolio will continue to get affected as long as volatility in the stock market continues. Considering that volatility is a natural phenomenon of the stock market, a well-defined time horizon helps you in not only weathering the unpredictability but also in continuing your investment process in an uninterrupted manner.

Besides, to ensure that your portfolio is not entirely dependent on the stock market’s moods, you must practice the strategy of asset allocation. Asset allocation allows you to parcel your investments into asset classes like equity, debt and gold, and is important because different asset classes tend to perform differently over different time periods. Therefore, the outperformance or underperformance in different asset classes tend to offset each other over a period of time. For example, while you may have periods of time when equity portfolio will not do well, other asset classes like debt and gold could provide healthy returns. This is exactly what the situation is currently like.

Gold has been the best performing asset class so far this year. Even on the debt side, there are options like FMPs that provide a great opportunity to lock in money for a fixed period at higher yields. Among the open-ended funds, there are options like short-term funds and income funds following accrual and duration strategy. A situation like this can certainly allow investors to keep their focus away from non-performance of equities and wait for its turn to do well going forward.

It is also important that you continue to monitor the performance of funds in your portfolio. Many a time, investors ignore this aspect when the stock markets are depressed. The best way to analyse the performance of a fund is by comparing it with that of the peer group.

Hemant Rustagi
CEO, Wiseinvest Advisors