As an equity investor you might be aware that markets have been spiraling lower on a daily basis. If you don’t know the exact numbers, let me put it in perspective:
The Nifty 50, large cap index, is down 8.5% or around 1000 points since the 1st of July 2019 (less than a month and a half)
The Nifty Midcap 150 index, is down nearly 11% in the same time and the Nifty Smallcap 250, is down around 15%.
Do the numbers worry you about your equity foray?
THEY SHOULDN’T.
The reason is age old; equity is a long-term investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains.... Think of it like any new business which takes time to deliver profits.
We are going to use numbers now to explain this. The table below should help you understand this better.
PART I
In the long run, your gains accumulate
To arrive at this conclusion, we have taken 10 of the largest equity diversified mutual fund schemes by assets under management (AUM). At a sum of around Rs 2 trillion of AUM, these schemes represent roughly 25% of the equity assets in mutual funds and are likely to have the largest number of retail investors.
We have however, excluded schemes which didn’t have 8-10 years of performance history or in other words were not around 8-10 years ago.
For the chosen schemes we considered SIP returns as seen on two random dates (because investments are made on random days) 8-10 years ago and two random dates (not less than a year away) within the last 2 years.
We decided to use SIP returns rather than point to point lump sum returns, because of the wide acceptance of this investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... strategy and its ability to cut through market volatility in the long term.
For all these four dates, the annualised return is presented for you.
Here goes:
| TABLE 1 | ||||||
|---|---|---|---|---|---|---|
| Short term returns almost always will look weaker when compared to long term annualised returns.Returns of these large schemes will show you why you need to be on the long term side and stop worrying about the short term returns | ||||||
| Fund | Category | AUM (Rs Cr) | Long term SIP returns | Short term SIP return | ||
| SIP Start Date | SIP Start Date | |||||
| 17th Sep 2009 | 25th Apr 2010 | 30th Dec 2017 | 5th May 2018 | |||
| Kotak Standard Multicap Fund | Multicap Eq | 25,845 | 15.06% | 14.54% | 0.88% | -1.82% |
| SBI Bluechip Fund | Large Cap Eq | 22,679 | 13.12% | 12.63% | -0.68% | -2.56% |
| HDFC Equity Fund | Multicap Eq | 22,215 | 12.87% | 12.11% | 0.72% | -2.45% |
| ICICI Prudential Bluechip Fund | Large Cap Eq | 22,117 | 12.78% | 12.21% | -0.74% | -3.45% |
| Aditya Birla Sun Life Frontline Equity Fund | Large Cap Eq | 21,664 | 12.35% | 11.74% | -2.64% | -5.34% |
| HDFC Mid-Cap Opportunities Fund | Midcap Eq | 20,893 | 15.65% | 14.64% | -10.35% | -13.90% |
| Axis Long Term Equity Fund | Multicap Eq | 19,718 | 15.89% | 16.47% | 1.58% | 0.61% |
| HDFC Top 100 Fund | Large Cap Eq | 17,095 | 12.45% | 11.77% | 2.30% | -1.47% |
| Mirae Asset Large Cap Fund | Large Cap Eq | 13,618 | 14.25% | 14.37% | -0.19% | -0.25% |
| Reliance Large Cap Fund | Large Cap Eq | 13,076 | 13.77% | 13.05% | -1.67% | -5.49% |
Source: MoneyPuzzle Research
What you should take away from this table
- Across the schemes the long-term return ranges from roughly an annualised 12% to 15%. What this means is that a Rs 1000 SIP started in September 2009 and continued till August 2019 (last SIP done in July 2019) would result in a corpus of roughly Rs 2,22,000 on an investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... amount of Rs 1,19,000.
- It is not a coincidence that long term returns are positive in double digits for all the schemes on both the dates. It is significant that the range is across schemes, which means that you could have achieved the lower range of 12%, simply by remaining invested in any of these 10 schemes.
- The scheme that has delivered the highest return in the long-term period is also the one delivering the biggest losses in the short-term period. This is also not a coincidence. That scheme is firmly set in the midcap category as opposed to the large/multicap in case of the others. Mid cap schemes carry higher risk that large cap-oriented schemes – as a result of this higher risk the return expectation is higher in bull markets and the losses are greater in times of market correction.
- The two dates that showcase the short-term return, have a lot of redder marks. This is not a fluke either. A look at the next table will tell you why.
Short term returns in equity nearly always fall short of expectations
In this table we have compared returns for the 2-year period between 2009 and 2011, taking the same starting date as we did for Table 1 – 17th Sep 2009.
| TABLE 2 | |||
|---|---|---|---|
| Short term returns almost always will look weaker when compared to long term annualised returnsReturns of these large schemes will show you why you need to be on the long term side and stop worrying about the short term returns | |||
| Fund | Category | AUM (Rs Cr) | Short term SIP return2 year SIP from Sep 2009- Oct 2011 |
| Kotak Standard Multicap Fund | Multicap Eq | 25,845 | -3.92% |
| SBI Bluechip Fund | Large Cap Eq | 22,679 | -7.88% |
| HDFC Equity Fund | Multicap Eq | 22,215 | -2.11% |
| ICICI Prudential Bluechip Fund | Large Cap Eq | 22,117 | 1.73% |
| Aditya Birla Sun Life Frontline Equity Fund | Large Cap Eq | 21,664 | -4.24% |
| HDFC Mid-Cap Opportunities Fund | Midcap Eq | 20,893 | 8.74% |
| Axis Long Term Equity Fund | Multicap Eq | 19,718 | 4.14% |
| HDFC Top 100 Fund | Large Cap Eq | 17,095 | -2.58% |
| Mirae Asset Large Cap Fund | Large Cap Eq | 13,618 | -1.38% |
| Reliance Large Cap Fund | Large Cap Eq | 13,076 | -5.50% |
Source: MoneyPuzzle Research
Had you started your equity SIP in September 2009 and looked at your returns in October 2011, red marks is what you are likely to have seen. Remain invested for 10 years till August 2019 and you see the positive impact from the numbers in Table 1.
This is the truth about equity returns, they accumulate only over longer periods of time. Long term is not 1/3/5 years it is more like 7/10/12 years.
Part II
Asset allocation will do the trick
The other thing you need to have some perspective on is asset allocation. Putting all your eggs in the equity basket will eventually hurt when you go through a market correction. That is why you need to split it up. Bulk of your portfolio return will come from this allocation.
Have a look at the simulation example below.
| TABLE 3 | ||
|---|---|---|
| Choose your asset class based on your income, cash flow needs and risk appetite | ||
| An illustration on how asset level diversification would have impacted your returns in FY19 | ||
| A portfolio with equity, gold and fixed deposit in equal measure | ||
| FY 19 return/interest | Proportion of allocation | |
| Equity | -10.00% | 33.33% |
| Fixed Deposit* | 6.25% | 33.33% |
| Gold | 4.20% | 33.33% |
| Portfolio return | 0.15% | |
| A portfolio with equal portion in equity and fixed deposit and 20% in gold | ||
|
| ||
| Equity | -10.00% | 40% |
| Fixed Deposit | 6.25% | 40% |
| Gold | 4.20% | 20% |
| Portfolio return | -0.66% | |
| A portfolio with 70% in equity, 20% in fixed deposit and 10% in gold | ||
|
| ||
| Equity | -10.00% | 70% |
| Fixed Deposit | 6.25% | 20% |
| Gold | 4.20% | 10% |
| Portfolio return | -5.33% | |
Source: MoneyPuzzle Research
Equity return is the FY1 return for Nifty 50 Index, Fixed deposit is the one-year SBI FD rate in 2019, Gold prices are MACX price return for FY19
You can see how a portfolio with equal amount invested in equity, fixed deposits and gold performs up to 3% lower in the same year compared to a portfolio with 70% in equity, 20% in debt and 10% in gold. Now let’s say all other things remain the same, except equity returns for the year are at -10%.
Portfolio 1 would still deliver a marginally positive return, whereas, Portfolio 3 will have a loss of 5%. If you had only equity or 100% equity investments – your portfolio would be down 10%.
Hence, allocation matters.
The allocation you choose will depend entirely on your financial objectives and requirements. No two people will have the same allocation requirement as no two people have exactly the same financial objectives.
Listen in to our conversation with Lovaii Navlakhi of International Money Matters for more on this.
End Note
It is easier to write about long term investing than it is to actually endure it. If you have started investing recently, don’t think you made a mistake. The mistake would be to stop now or to get out.
If you still don’t understand, go back to the start of this article and READ IT AGAIN!