Patience always pays

Up, down, up, down, up, down. Don’t mistake this for a physical education drill. These are the monthly returns of the Nifty in the past six months. Sure, the trend in 2009 was decidedly bullish, but the markets also got a fair share of volatility. Sharp upmoves were followed by steep declines. For the mutual fund investor, the volatility underlined the importance of regular savings. He learnt that systematic investment plans (SIPs), which help average out the costs, are perhaps the best way to invest in equity funds.

The year turned out to be better than expected for most equity investors. The returns earned by equity funds this year are more than what they lost in 2008, says A. Balasubramanian, CEO of Birla Sun Life Mutual Fund. However, the investors who had given up hope after burning their fingers in 2008 lost out on the opportunity to recover their losses when the markets rallied. The message: patience always pays.

Sebi took proactive steps in favour of the investor this year. The removal of entry loads on investments in mutual funds was one such measure. Investors now have the option to buy directly from the fund house or pay the broker a separate commission. The payment is to be in accordance with the level of advice and services rendered. Soon, investors will also be able to buy funds through stock exchanges (see The New Route to Mutual Funds, pg 14). While this brings transparency and lowers the cost for investors, they also need to do their homework before investing. Convenience and professional advice come at a price. If investors don’t want to pay extra, they will have to do their research and invest directly.

Sebi also prevented funds from giving indicative portfolios and yields. This might have created difficulties for investors who like to know what they are getting into. Distributors also have to disclose the commissions they receive from fund houses for various schemes. This can help investors know if the broker’s recommendation is guided by the commission he will earn.

Equities were not the only ones to shine this year. Gold prices also rose, clocking returns of 25% between 1 January and 18 November. However, the returns from debt funds slipped. The average medium-term debt fund has earned 0.5% in 2009 compared with 14.5% in 2008. The prospects of a rise in interest rates caused bond prices to come down. For investors, this was a reinforcement of the diversification principle. Simply put, don’t put all your eggs in one basket.

This also means that an investor should never lose sight of his asset allocation. “The investors who paid heed to their asset allocation were able to take advantage of the market rallying from the levels of 8,000 to 17,000,” says Vikaas Sachdeva, country head, business development, Bharti AXA Investment Managers. He points out how many small investors sold equity in 2008 and bought in 2009, whereas they should have done just the reverse.

Discipline should be the cornerstone when it comes to dividing money between assets. Also, asset allocation should take into account the investing time frame. Don’t invest in equities if you need the money in the short term. Many investors learnt this the hard way in 2008. Don’t go for debt if your term is longer than 1-2 years. We learnt that in 2009.

• Convenience and tailored information come at a price. If you don’t want to pay extra, do your own research on the right funds and invest directly.
• Invest small amounts regularly, irrespective of market conditions. SIPs, which average out the costs, are perhaps the best way to buy equity funds.
• Asset allocation should take into account the investing time frame; debt works for terms under five years and equities deliver over a longer period.
• Don’t put all your eggs in one basket. Equities and gold did well this year, but the returns from debt funds slipped. A diversified portfolio is a good hedge.