Weekend Bytes
The folly of expecting every investment to be a winner!!
We have often heard the old saying “Well begun is half done”.
While it holds true in most walks of life, in the world of investing, beginning early - although critical - is not the be all and end all for a favourable outcome. Starting an investment is only the start of a long journey filled with countless ups and downs. Investors, who expect the journey to be smooth and growth to be linear, end up being disillusioned within no time.
As per a SEBI report, over 50% of Mutual Fund Investments redeemed^ in FY23 were held for less than a year. Another 23% of units redeemed in FY23 had a holding period between 1 and 2 years. In fact, only 3% of the units redeemed were held for more than 5 years.
While there could be numerous reasons for this, one major factor is the misplaced expectation of every investment delivering desired returns at any point in time. This overlooks the fact that different market cap segments, asset classes, sectors outperform each other at different point in time.
One could take a leaf from the game of Cricket here. A cricket team comprises Batters, Bowlers, All Rounders, Wicket Keeper. Even within Batters, you would have players with varied batting styles like Sheet-anchor, a pinch-hitter, a finisher etc. Different playing conditions, beyond the control of players and selectors, have an impact on the players’ performance. If a Coach starts expecting every player to perform in every match of every series then he would be in for a major disappointment. This holds true in the world of investing too.
For Instance, BSE SmallCap 250 TRI corrected by 26% in 1 year ended 31-Jan-2019. An investment in a Small Cap Fund could have shown sharp underperformance during this period. Investor with an expectation of perennial outperformance would have ended up redeeming from such a fund, only to end up missing out on the subsequent recovery. Worth noting that subsequent 3 Year Returns of BSE SmallCap 250 TRI (from 31-Jan-2019) was ~25% CAGR. (Source MFI Explorer)
Past performance may or may not be sustained in future and is not a guarantee of any future returns.
Consequently, investors should not expect all invested funds to do well at all points in time. It is prudent to view the performance of Mutual Fund schemes in light of their investment objectives, performance of the category, causes for outperformance/underperformance etc.
Just like selectors in cricket, investors ought to undertake a periodic review of their portfolios and evaluate if the fund is being managed as per the stated investment objective. Closer look at portfolio changes, what has worked for the fund and what has not could give you better idea of how the fund has been managed. One could consult a financial advisor for the same.
At the end of the day, one needs to understand that there is no alternative to portfolio diversification in investing; and diversification by design would mean that not all investments would do equally well at all points in time. A sound financial plan, investing as per one’s risk appetite, selecting appropriate products and staying disciplined is all an investor should think of.
