Mutual Fund Investors should look for long term Investments

These are trying times for equity mutual fund investors. A mere look at the performance of diversified equity schemes in the last one year is enough for most investors, especially the novices, to feel giddy.

Sure, they are yet to hit the panic mode and queue up before the fund houses to redeem their investments, but many investors are cutting down their regular investments and avoiding renewal of their systematic investment plan (SIP) to arrest further erosion of their wealth.

‘‘Yes, investors are concerned because diversified equity schemes have given negative returns in the last one year. They have completely stopped investing in lumpsum amounts,” says Uday Merchant, a mutual fund broker. ‘‘Investors are also refusing to renew their SIPs. And some are reducing their systematic investment plan amount.” He is quick to add, though, that there is no panic as such, as most investors are ‘‘well aware” of
the risk they are taking in a equity scheme.

However, most investment advisors believe that it is only a matter of time before individual investors hit the exit route. ‘‘If the market is going to be volatile like it was today, more people are likely to get worried,” says an investment advisor. ‘‘Most people lose their nerves if the market swings violently daily for a week or two. It is sad because they would lose an opportunity to participate in the next recovery rally.”

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He and his ilk would like investors to shift their focus from one-year performance to three to five years. ‘‘We all speak about long-term when the market is performing well. The moment it starts going down, we go by short-term trends,” said a mutual fund manager.

He has a point. For example, look at the performance of DSP Merrill Lynch Top 100 Equity (see table.) The fund may have given negative returns in the last one year, but it has given around 19% returns in the last three years and 29% in the last five-year period.

Also, the idea of slashing the SIP amount or abandoning the systematic investment plan plan is likely to harm investors in the long run, say investment experts. ‘‘The very idea behind SIP is to benefit from cost averaging,” says an investment advisor. ‘‘The moment you start tampering with the SIP, you are cutting yourself out.”

You would benefit from averaging of your purchase cost when you are investing regularly over a long period of time. This would, at least in theory, enhance your scope of earning better returns. Also, it imparts financial discipline and saves you from the vagaries of short-term trends in the market.

Source : Times of India (09-10-08)

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