Has your MF investment worked out?

To begin with, my apologies to all my readers, many of who have enquired of me as to why I was not writing in my blog, for my long absence from the blog. It was caused by a random occurrence of several factors – a couple of trips abroad, some mentoring work for B school students, my son’s starting of his professional career, my parents visiting Hyderabad etc. Let us see whether I am able to keep up this new resolution !!

Let me take up something which a lot of people have been asking me for much of this year. Has it been beneficial to invest in Equity MF over the years? Many people had started the MF investments through SIP, being lured or convinced by agents or advisors, thinking that an annualized return of 12-15 % on an average was a given. Yes, it was understood that equity as an asset class will be having the ups and downs, but over the long run it was kind of given to undestand your money will double every 6 years. A lot of financial planning for most people have been based on this premise over the last 10 years and it is a good time to take stock of how things have panned out.

As I have been dealing with equity for nearly a quarter of a century now, I probably have a lot of knowledge and experience to speak somewhat definiteively of this. In January 2008, Nifty scaled 6000 for the first time before the now famous crash of that year. Even if we assume that Nifty will reach 12000 in January 2020 ( a fairly tall order some may say, though I am hopeful), it would have only doubled in 12 years. This is a return of only 6 % as opposed to the 12 % that most investors have been sold into. Even if you looked at a supposedly stodgy product such as PPF, you would have earned nearly 8 %. More importantly, if you had planned some goal for 15 years in 2010, you are now probably faced with the prospect of being way short of your goal. This is fine if you have 20 plus years of your career left but for people in their 40’s and 50’s this is a fairly tough situation. People who are interested in financial independence and looking at doing different things will now need to re-evaluate their options.

Does this mean that the MF investment has been wrong? Not at all – equity as an asset class is really the only sensible way to beat inflation in a country like India and MF is a good vehicle for this. Also, though Nifty returns are only 6 % annually, most of us invested in well managed active funds and these returns are somewhat better, though nowhere near the 12-15 % that were touted without any real sense. With the changes in MF categories by SEBI, it may also make more sense to stick to funds that invest in the top 150 or 200 companies, unless you have a lot of time on your hands. Finally, do not put all your eggs in one basket, invest in fixed income products and other instruments that can serve as a hedge and provide you stable returns even if unglamorous.

The above is all very fine for people starting now but what of people who have been investing for long and have now not got enough in their kitty for their goals? They will definitely need to work out different strategies – I will take up one case study from a person who wanted some advice from me recently.

Bottom line – MF investments are good for your financial life but you need to do these by being more aware of it as compared to before. The old method of deciding on a SIP amount and letting it be in the auto mode will not work any more.