Systematic investment plans have grown in popularity now. The lessons learnt in the year 2008, have helped many intermediaries and investors to rely on the time tested method of systematic investing in mutual funds. Many new investors are now ready to invest in mutual fund SIPs without even completely understanding how they work. Lot of SIPs are initiated but not continued for long periods. On the one hand I appreciate the awareness but I also thought this would be a right time to take a look at three key points while investing in mutual funds. Debt funds are yet to become very popular with the retail investing population and hence, when I say mutual funds, I refer to equity funds in general.
The Super Market Parallel
Businesses take time to deliver
- If a super market comes up in your neighbourhood, how much time would the owner of the business wait before breaking even? Definitely not a few weeks or days, right? He would be prepared to wait for a good number of years depending on the size and scale. This phase would be very challenging but it is the preparedness of the business owner, to wait for the business to gain momentum that would sail him through. Similarly when you invest in a mutual fund, you should understand that you are investing in businesses across various sectors. Though the price people pay for those businesses in the stock market is not always rational, stock prices eventually follow the earnings of the respective businesses. Sooner or later, they would align to this reality. Hence, the willingness to wait for long term, preferably more than five years, would result in returns in the range of 12 to 15% compounded and annualised. Stay the course during lean periods
- The business owner would clearly have an understanding that there would be lean periods resulting in poor turnover or foot falls. He would not cry or complain but instead he would ensure adequate preparation is made for the stronger seasons ahead! Likewise, every fund would have a year or two or sometimes three years when the performance would be poor if not miserable. This could be the result of bad markets or value buys waiting for bigger gains. If the process of choosing schemes has an element of science then, as an investor it would be easy to sail through this phase. In fact, a better understanding of the fund's underperformance should be made by interacting with your financial advisor. If the conviction to throw more money in such funds is on your side, you should go ahead and wait for the next big wave. Address your needs
– The super market would be flooded with lot of products. If you are a vegetarian, you would avoid some sections of the store. Similarly, you would not buy whatever is available in the store. You enjoy buying some brands but do not go for some even if offered at a discount. Likewise, there are many products in the equity category, right from balanced to sector funds. Many brands are available to choose, some very popular and some unheard of. While buying funds, keep your needs in mind. Understand your needs, take a good idea of the level of risk you could be comfortable with and then choose the fund. Selecting a fund is a separate topic that would require a different day to dwell upon. Do not go for a wide range of funds at will just because you could pick them up. Buy what would be beneficial to you depending on your goals, else stay away.
To conclude, investing lessons are always available on the road and neighbourhood. It is the duty of you, the investor to keep your eyes and ears open and pick up those lessons. As they say, when the student is ready the teacher appears. Sridevi is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.