Business as usual | Taking stock
The market may be in a state of flux but, in the long term, equity funds should give over 10% returns, Arun Kumar.business Updated: Oct 21, 2007 01:08 IST
Fear has gripped Indian equities after the government’s decision to moderate the flow of foreign funds into the country’s bourses through participatory notes. The obvious question now is: is this the end of the bull run that the indices have witnessed? Is this the end of investment opportunities? Or is there life beyond the bull run?
Despite the uncertainty, equity markets would continue to provide reasonable returns over a longer term of 5-10 years. There can, however, be no guarantee of huge returns that has been the norm over the last five years.
The definition of reasonable returns differs among analysts, but experts feel that anything above 15 per cent would be attractive.
According to mutual fund data, it is clear that equity funds continue to give over 10 per cent returns over a long term even in the worst-case scenario.
Since February 11, 2000 — when the BSE Sensex touched 6005 during the heydays of the Internet boom, and subsequently fell to a low of 2600 in September 2000 following the bust — equity mutual funds have given returns of anywhere between 11 per cent and 35 per cent. This is far higher than the returns that fixed instruments provide.
In fact, the five best funds had given returns between 29.76 per cent and 34.59 per cent, and even the worst performer has had an annualised return of over 10.52 per cent.
The hybrid equity-oriented funds (which invest a majority of their corpus in equities and around 30 per cent in debt instruments) had also shown annual returns between 10.54 per cent and 26.75 per cent.
These are extreme presumptions, for investments made during the peak of 2000. In cases of investments staggered over a period, the rate of return would have been much better. Besides, in many cases, investments in equity-linked schemes that availed of tax benefits, the actual return would have been much higher.
Let us take, for instance, a five-year horizon beginning October 2002.
The return was phenomenal. Between October 15, 2002, and October 15, 2007, the Sensex gained over six times to breach 19058 from just 3,000. The equity mutual funds have clearly give high returns between 36 per cent and 69 per cent.
The top five performers have shown returns between 63 per cent and 69 per cent, while even the five worst funds have anywhere between 36 per cent and 42 per cent. Hybrid equity funds also fared very well, with return of 29 to 47 per cent.
The investment in equity is always subject to risk since it does not guarantee any return. Equity investments are linked with the fortune of the economy, sectors and promoters of the company. Let us presume that the Indian economy would continue to grow at 8 per cent per annum. This implies that while some sectors would outperform, growing over 8 per cent, others will lag.
Sectors such as manufacturing, power, software services and others growth areas are expected to grow faster than overall economic growth. The leading companies in these sectors will outperform their respective sector’s growth.
When to invest
It is impossible to predict the right time for any investment — whether in 2002, when the Sensex was at 3000; or in 2007, when it scaled lifetime highs. However, given the overall economic growth rate, the degree of uncertainty differs from time to time.
Staggered investments are the most ideal. Commonly known as the Systematic Investment Plan (SIP), these work on the formula of averaging out gains or losses. If you invest a certain amount, say Rs 500 a month or even more depending upon your ability to invest, the volatility would not affect the return over the long term.
“Since you are investing every month, your unit price comes down in the event there is a sharp correction in the market. If the markets rise sharply, the acquisition price is higher,” says Vijayan Krishnamurthy, chief executive of JP Morgan Mutual Funds.
The right choice
Mutual funds offer a variety of schemes such as diversified funds, blue chip funds, sector-specific funds like IT, power, infrastructure, and mid-caps.
At any give point of time, some sectors perform better than others. But performance is not permanent, like in the case of the IT sector. The key is to exit the fund before a correction in the sector begins.
The investors’ appetite and ability to sense potential growth in a particular sector is crucial while selecting sector-specific funds.
In the case of long-term investors, who are not fully aware of market dynamics and related risks, it is advisable to leave it to the fund managers.
It is better to invest in a fund that has a wider scope for investment and does not restrict itself in a particular compartment.