Dhirendra Kumar, CEO of Value Research, an online website tracking mutual funds, advocates a patient approach to creating wealth that focuses on the process rather than the outcome.
Kumar spoke to BT’s Shailendra Bhatnagar about why staying committed and not letting short-term market movements dictate investment decisions, is the key to long-term wealth management. Edited excerpts:
Are we currently in a bear market?
Market fluctuations are inherent to investing. Most investors tend to chase recent performance, which leads to disappointment, especially for newer participants. Small-cap funds, for example, have declined by 20% over the past three months but are only down 3% over the past year. If you invested three years ago, you’d still be sitting on an annualised return of 16%.
Investing in equities is not like a fixed deposit, yielding 15-20% consistently. Equity markets provide superior long-term returns but with inherent volatility. There will be years of exceptional growth and periods of sharp declines. Unfortunately, short-term investors often react disproportionately to corrections.
While a 15-20% decline in three months is unusual, it is part of market cycles and not necessarily a cause for panic.
One prevailing concern is that many mutual funds hold stocks with limited liquidity and are now struggling with costly exits. For those with SIPs (systematic investment plans) in small-cap and mid-cap funds, what do you advice?
This is the nature of small-cap investing. The small-cap universe consists of nearly 4,500 listed companies, of which around 3,500 actively trade on most market days. However, Indian mutual funds invest in only about 850 stocks, meaning that a significant filtration process occurs.
Liquidity risk exists but only materialises if you sell during downturns.
Some high-quality companies have limited free float because promoters hold significant stakes, making their shares less frequently traded. In volatile conditions, small caps are highly sensitive to investor actions, leading to sharp declines. However, this very characteristic also allows them to deliver superior long-term returns.
Historically, over any five–seven year period, small caps have outperformed other categories. The key is to endure short-term declines and, if possible, invest more during the downturn.
Small-cap investing is not for the faint-hearted but can be highly rewarding for patient investors.
So, if you are a small-cap investor, is it best to let the fund manager handle stock selection while you continue your SIPs, allowing volatility to settle over time?
Absolutely. Additionally, while the average small-cap fund has declined by 20%, some funds are still delivering 12-15% returns over the past year.
The pain in individual small-cap stocks is often greater than in mutual funds, where diversification cushions the blow. Unlike individual stocks, mutual funds rarely see 50% declines.
Given the inexperience of young investors who are starting out, what asset allocation would you recommend for them moving forward?
For those just starting, asset allocation should not be their primary concern. Asset allocation is like an insurance policy—it helps mitigate risk, but a young investor with a long-term horizon should focus more on staying invested.
Market downturns can be unsettling, especially for someone who started an SIP three months ago, saw his investment grow, and is now witnessing a temporary decline. Instead of panic, they should view this as an opportunity to buy at lower prices.
Ideally, the market should remain subdued while you are accumulating wealth, only rising significantly when you need to withdraw funds, say five to seven years down the line.
However, investors tend to do the opposite—they rush to buy when markets soar and hesitate when prices drop. This is counterproductive. The best approach is to continue SIPs consistently. Redeeming investments prematurely turns notional losses into permanent ones and prevents investors from experiencing the wealth-building power of compounding.
Investing in mutual funds democratises wealth creation, allowing small, regular contributions to accumulate substantial sums. Investors should not try to time the market; they are savers, not traders. If history is any
Indication, markets have always rewarded long-term investors, And no five-year investment Horizon has resulted in a loss.
I believe the market could recover sooner than expected.
@shail_bhatnagar
