SINCE you have a three-year time horizon, and are willing to take risks, I suggest you consider investing in equity mutual funds," I told him last week. "But is this the right time to invest?" he queried. "Anytime is a good time to invest," I said, tongue-in-cheek, especially since I believed that these were indeed long term funds.
From a three-year perspective, I would be happy to jump in, but would my prospective client be able to ignore the bumps and volatility along the way?
You don't have to go all in
Investing in equities is not like a game of poker. Equities are an asset class to build long term wealth, though it may be difficult to ignore the noise and clutter from the glut of television channels and publications that implore you to try your "luck" at this game to change your fortunes overnight. Successful investing requires discipline - imagine what would happen if you planned to grow a tree by pouring all the water that was needed for the next month at one time.
Systematic investing
There is always a debate between financial planners who suggest a staggered approach to investing, and impatient investors who want a quick fix: they feel miserable if they miss a 150-point rally in the Sensex (less than 1% at today's levels); and much worse if an equal fall occurred the next day after they invested. So I decided to dig into some data over recent and not so recent past, and came up with results that supported investing through the systematic investment route.
Flat market, but steep results
The BSE Sensex rose 2% from October 1, 2009 to March 31, 2010, or below 5% p.a. During this same period, had I invested on a weekly basis, my investments would have generated a return of over 15% p.a. during the same period. (See Table)
During this period, the markets have largely been range-bound (16000 to 18000 on the Sensex) and we may be in for a further period of 3 to 6 months during which time these conditions may continue to prevail.
Taking a step back
I did not want to stop only at this six month data, and decided to go back to January 2008 when the markets peaked at 21000 Sensex levels and moved down for nearly 15 months before perking up during March to September 2009. The BSE Sensex at 17700 levels in end June is down 15% from early January 2008. However, my weekly SIP in a large cap equity fund is up 48% against a Sensex growth of 28% during this time. While we all know that midcap stocks fell more sharply during 2008, the results of SIP (systematic investment plans) investment in midcap schemes are even more startling. A basket of midcap funds have risen 50% to 65% during this same time frame. But the benefits of these returns would obviously have been available only to those investors who were strictly disciplined and kept their faith going during 2008. Were you one of them?
