Think Long-Term To Build Wealth

A fundamental truth of equity fund investments is that you need to stay in them for a reasonable time frame and allow different market cycles to average out your returns, as well as to get the opportunity to buy at the lower levels. Having a clear time horizon is as important as sticking to your time commitment, says Hemant Rustagi

Equity is one of the asset classes that can help investors stay ahead of inflation and achieve their long-term goals. However, despite this well known and proven fact, retail participation in equities has remained very low. One of the reasons for this apathy towards this wonderful asset class has been the prolonged periods of either low or negative returns.

The moot question is whether the fault lies with this asset class or with the haphazard approach followed by investors. Considering that volatility in the stock market is a natural phenomenon, all investors must be prepared to face ups and downs. The key to investment success lies in tackling these volatile periods by following a disciplined approach and focusing on long-term investment goals. Simply put, equity investments require a time commitment, i.e. to remain invested through one’s time horizon irrespective of the market conditions.

Unfortunately, only a small section of people invest in equities with a clear time horizon. In fact, even those who begin their investment process after careful planning often abandon it during market downturns. Surprisingly, they turn bullish and begin investing aggressively again when the markets start doing well. In the bargain, they miss out on investment opportunities that exist during downturns.

It is disturbing to see investors stopping their SIPs in equity funds abruptly after a year or two, getting disillusioned after comparing their one-year SIP returns with FDs or FMPs. Then, there are those who make investments randomly here and there and hope to earn big returns, losing sight of the fact that making one-off investments is tantamount to timing the market. And timing the market is a strategy that even the most experienced of investors fail to implement with perfection on a consistent basis.

Needless to say, this short-term and haphazard approach often produces disappointing results for investors and they are drawn back to the safety of FDs and FMPs. By doing so, they expose themselves to the risk of not earning a positive real rate of returns (i.e. returns minus inflation) on their long-term investments. Considering that inflation is a far bigger risk for long-term investors, this makes a significant difference to the true worth of their portfolio value.

This is where equity investments in one’s portfolio can make a difference. However, to benefit from the true potential of equity funds, one must continue the investment process irrespective of market conditions. In fact, volatile periods actually help in bringing the average cost down over time. The performance of funds in the table highlights the benefits of systematic investing over the long term:

(Note: Past performance may or may not sustain in the future)

As is evident, investments made systematically over five, eight and 10 year periods made significantly higher returns as compared to those made over three years. For example, for investments made through an SIP in Birla Sunlife Frontline Equity Fund over the last three, five, eight and 10 years, the annualised returns are 2.53, 11.55, 11.52 and 15.29 percent respectively. For the same periods, ICICI Pru Dynamic fund gave an annualised return of 8.21, 12.08, 11.35 and 16.16 per cent. Another significant benefit of investing in equity and equity-oriented balanced funds is that long-term capital gains (i.e. gains on investments redeemed after the completion of 12 months) are tax-free.

While investing regularly over longer time periods is undoubtedly the best way to invest in equity funds, it may not be possible to do so in all cases. That’s why many investors often make lump sum investments as and when they have investible surplus. Unfortunately, a large section of such investors stop investing abruptly as soon as the markets hit a rough patch and thus often get either low or negative returns on such one-off investments. While they blame the poor returns on their decision to jump in at the higher market levels, the fault really lies with their reluctance to make subsequent investments.

Hemant Rustagi
CEO, Wiseinvest Advisors