For a long time investors have been told worldwide and especially so in India that it was good to keep investing in equity regularly without worrying about the ups and sowns of the markets. I must say that most of the people who started investing after 2008 had been quite benefited by the same too. The markets generally went up over the years and the MF schemes largely did well, at least till 2017 or so. However, as the last few traumatic months have taught us, investors cannot trust the passive mode of investing any longer.
Let us understand the issue with MF portfolios in light of what happened this year. I will try to illustrate my point with 5 year and 3 year returns of some of the more popular MF schemes :-
- ABSL Frontline Equity has 3 years return of 1.5 % and 5 years return of 5.3 %
- HDFC Top 100 has 3 years return of 1.3 % and 5 years return of 4.7 %
- ICICI Value Discovery has 3.4 % for 3 years and 4.4 % for 5 years
Note that these were the apple’s eye of the finiancial planners 5 years back and they pushed these schemes for most people. These have lost favor now but most of you who are having investments in MF over 7 years or so will be having them. Obviously these have not worked out too well when the average PPF returns were more than 8 % in the corresponding period and even today’s lowly FD rates are more than 5.5 %.
Some people may start wondering whether equity is worth it at all or not but that will be akin to throwing out the baby with the bathwater. What we really need is active investment in equity, the passive investment model of keeping on investing in an SIP mode and having blind trust obviously does not work. Some of the elements of active investing will need to be as follows :-
- Do not have a SIP mechanism like the one you have now. Invest regularly every year or even every month BUT vary your purchases of units based on the market state. This is something I have recommended in the blog for a long time and you can read some of my older posts as to how this can be done.
- If you are investing for a particular goal in your SIP portfolio, have a hybrid fund or a pure debt product such as PPF linked to the goal. Whenever you have a high market gain, redeem some money from your SIP portfolio and put it into the hybrid fund or PPF. This step protects your gain and serves as a hedge against you having to distress sell your SIP portfolio, should the markets tank and your goal is at hand.
- Review your SIP portfolio annually and be ruthless about weeding out the non performing MF schemes.
What about the Stock portfolio then, if you do have one? My belief is you should only get into a stock portfolio if you understand it reasonably well, are willing to learn and can afford to spend time on it. The passive mode of buying some good stocks and forgetting about them will not really work. For every exciting story you read about on the internet, there are hundreds of failures that never get talked about. A stock portfolio will be a great thing to have for people who can manage it actively. If you are one of them go ahead, there will be risks associated but the rewards are great too.
One may ask whether it is possible to do active investing with a full time career and other family responsibilities. If you are finding it tough then engage a financial planner BUT explain to him clearly as to how you want things to be handled. Do not agree to the passive mode of investing, what happened in 2008 and 2020 may well happen again.
On a personal note, I am happy to say that I am starting 2 HELP engagements with this week and both people have been long term readers of my blog 🙂 People interested in knowing more about HELP can search for the posts in the blog. I am looking to sign up 3 more people in August, so write to me at email@example.com if you are interested.