MF buying price – does it matter in the long run?

Now that I have stopped doing SIP after seven long years and have started to advise others, subject to their own understanding, to do the same, I get a lot of communication on the subject, both directly and indirectly.

One of the very interesting things that I read recently is that since we are investing for the long term, purchase price of the MF units really do not matter much. Few things shock me after having been in the corporate world for nearly 28 years  but the complete lack of logic of this statement did. Let me look at it a little closely to see if it makes sense.

Now, I understand what the author meant – he was trying to say that since in the long run of 15-20 years the final price will be very different from the buying price, therefore the impact will not be felt much in the final outcome. There are 2 very fundamental objections that I have here. The first is grounded in the principle of sensible buying – when we try to buy everything at the best possible price, why should it be any different for MF units? Yes, I can understand if the buying mechanism is very convoluted and takes a lot of effort but in reality it does not. My second objection is far more substantive – it is incorrect to say that the difference in the final outcome would not matter much – I encouraged one of my blog followers to actually do a calculation and see for himself. Over a 20 year period the difference was one of 47 lacs. Now, I know in future terms 47 lacs may not be a great amount but then again, it is not exactly loose change, is it?

The reality is simple – the market will always give you opportunities to invest in it sensibly. Putting the same amount of money on the same date every month is simply not a sensible way of doing so. The fact that most people are doing it does not make it right, not does it make any contrary viewpoint the wrong one. 

The term “noise” is used far too often to discount what we do not like or want to deal with. Interestingly, while I have had a lot of people telling me how completely wrong I am about SIP, I have not found a single person who could logically explain to me why I am wrong. If you are happy to buy your MF units at a higher price and feel no problems that your investments in 2015 are all negative today, well and good. However, that does not make a different viewpoint lack sense.

Quite the contrary really – the longer your time frame is, the cheaper you should try to buy your MF units at. Think about it on your own, by shutting out all the “noise” for once. You’ll see that it makes a lot of sense.

Advertisements

6 thoughts on “MF buying price – does it matter in the long run?

  1. Since you do not believe in compounding for equities, let me explain using different logic. Long term investors should be concerned about dividend pay-outs, bonus/rights shares, residual value and the net present value of these future cash flows. These are not dependent on entry price but on growth of company for direct equity or chosen fund for MFs.

    Higher the growth, longer the term, impact of entry price would be lower on ROI. That’s why Warren Buffet advocates “fair price” as entry point as different from “value investing” where lower entry price would matter.

    Like

    • Compounding for equity ?? How does work ? As far as I know , compounding in true sense only works for debt based instruments like say PPF , FD etc. For equity , its very much possible that money parked for 10 years may earn less than say money parked in some other stock for 2 years

      Like

      • Equity being part ownership of a company, in a growth environment, ploughing back profits into business or distribution as dividends would compound over time.

        DEFINITION of ‘Compounding’ The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding

        Like

  2. Mr Mani , I feel ,for direct equity it is not the time you are in market, like debt , where every day counts. So early entry should not matter… Secondly as about timing…currently mkt is in sloping down channel and it is very likely it will touch 6500, when ? Difficult for me to say. But if it does then for few yrs let us be in debt and try to time on yearly basis. If we hit 6500 in say 3 yrs , you will earn say 10% on current value of 7700/7600 for three yrs and enter at 6500 with this 7600+interest amt….what say? Have patience. Mkt is not going one way for yrs .

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s