It's said that earning reasonable returns from the stock market is easier than it appears, just as earning unreasonable returns is more difficult than one thinks. As our model portfolios complete their third month, it is time to define 'reasonable'.
The Wealth Maximiser portfolio, which has been analysed in detail below, has risen by 3.5% in absolute terms since its inception on 1 May. In comparison, investments in the Nifty on the same days would have yielded a return of 3%.
Clearly, the model fund portfolio has generated higher returns at a lower risk because it has a more diversified investment basket than the 50-share Nifty and has nearly 15% of its assets parked in the safety of debt and cash.
The picture is even more appealing when we calculate the returns on an annualised basis. The Wealth Maximiser portfolio has earned about 40% annualised returns. Are such returns reasonable? Yes, and no. It is acceptable for investors to expect their funds to outperform the markets and deliver decent returns.
They can also expect their funds to be less volatile than the benchmark indices because of the greater diversification across their portfolios. However, this is where it should stop. Wealth Maximiser might have done well, but two or three months is too short a period for an annualised extrapolation.
The fund will have to continue doing as well for the next three quarters to be able to earn 40% returns for the year. This is where expectations should be reined in. It is impractical to expect a unidirectional movement of the markets. The May figures for the Index of Industrial Production (IIP) are not very exciting. IIP growth fell from 16.5% in April to 11.5% in May, which is well below the market expectations of 16.1%. Has the market risen ahead of these figures? The first quarter results will tell us.
The monsoon too has been erratic. There is no threat of drought but the menace of floods exists. How this affects the rural demand that corporate India is banking upon is debatable. What is clear, however, is that the markets are likely to be range-bound in the coming months.
As the model portfolios are investing for the long term, they don't have to worry about the seasonality of the Sensex movement. The SIP mode takes care of any volatility and ensures that the purchase price is averaged out over the investing period. After a certain duration, SIPs present a win-win situation for the investor. If the markets go down, he gets to buy cheap.
If the markets go up, the value of his investments goes up. The other three portfolios have also delivered good returns. Money Builder has done better than the Nifty with a 3.1% growth.
This is commendable because the portfolio, designed for people with a moderate risk appetite, invests only 65-70% of its corpus in equities. We will analyse Money Builder in detail in our next issue. Stable Growth has lived up to its name with a 1.4% growth. Given the low risk in the portfolio, this is a healthy return. Income Generator, too, has managed a 1% growth. More importantly, this rise can be sustained because volatile assets, such as stocks, constitute only 15-20% of the portfolio.