"In the long run, we are all dead," so said renowned economist John Maynard Keynes. However, when it comes to the world of mutual funds, I would like to rephrase that statement to: "In the long run, master the art of patience and you shall reap the benefits".
I have always been of the opinion that the term 'long run' is extremely subjective and varies in reference to tenure, depending on who is using it. In the financial advisor community, this term could be anywhere between 3-5 years and could even extend up to 15 years. And that is the reason I once again reiterate that there is no right or wrong definition. It actually depends on the goals of the investor and the duration for which he is ready to block funds for that particular investment.
A few weeks back, the Regulator came out with a statement saying that there are 9 fund houses where more than 50% of their schemes have underperformed their respective benchmarks consistently for a period of 3 years and another 9 wherein up to 50% of the schemes have underperformed their benchmarks. In this context, the opinion voiced by many experts was that investors need to exit these funds and look at the better performing peers in the respective categories. Being in the research desk of a leading distributor firm myself, investors have always posed questions regarding their investments into a particular fund and our take on the same. For instance, in the recent months there have been questions on what should be done with investments into a fund like Reliance Growth that has underperformed over the last few years. My answer has been that Reliance Growth has been in the industry for more than 15 years and has always been a good long-term bet. A dip in its performance in the last few years should be considered as short-term volatility and investors need to be patient about this investment. We are confident thatSinghania and his team would make the appropriate modifications in the portfolio and will be able to turnaround the fund in the near term.
The objective of this column is to throw light on the benefits of staying invested in a fund for the long term and not to get sleepless nights by short-term fluctuations. Towards this end, I did an analysis on the funds which have been in existence for 15-25 years and have mentioned the observations below.
There are 42 funds in the industry which have completed 15 years in this business, with some funds having been around for almost 20 years or more. A perusal of the corpus of these funds brought to light an interesting insight, that is, 5 of these veterans (HDFC Top 200, HDFC Equity, Reliance Growth, SBI Magnum TaxGain '93, Franklin India Bluechip) constituted 20% of the AUM of all open-ended diversified equity funds as of March 2012. On the other hand, among these old-timers, there were 9 which had a corpus of less than INR 100 crore with some of them actually being in the range of INR 11 crore to INR 20 crore during the same time period. This indicates that these fund houses have actually not made any effort to promote these funds and that could be the reason for the unimpressive numbers. With this backdrop, the thought that comes to my mind is that the Regulator needs to take on these fund houses and ask them to either close the respective schemes or do a consolidation with the existing ones.
The silver lining is the performance of some of these funds and the benefits that would have accrued to investors if they had shown patience with these investments. For instance, all the top 5 funds in terms of AUM actually delivered returns in the range of 25% as against their respective benchmark which returned only 10% during a time horizon of 15 years. Let me highlight this fact with some numbers. For instance, if an investor had put in INR 1 lakh in Franklin Bluechip Fund and Reliance Growth on December 1, 1993 and October 8, 1995, this amount would have become INR 41 lakh and INR 40 lakh, respectively, as on June 29, 2012. A note of caution to investors is that some of the funds with such a long history have only given sleepless nights to investors by their pathetic performance.
To conclude, the question that obviously would come to investors' minds after reading this column would be on how to select the appropriate funds and stay invested for a long term. Here are the points to consider:
Select funds on the basis of your risk appetite and goals. Once you invest, don't forget about it. Remember, it's your hard earned money that is involved. Track the performance of the fund manager and the standing of the fund house and fund management team. Track the performance of the fund every year, but don't be hasty in giving an exit call. Funds in existence over a long term that have shown performance will definitely overcome short-term volatility. Sector funds are cyclical and are not for the faint hearted.