I am investing in equity mutual funds since last 1 year and my returns are negative, may be my mutual fund schemes are not doing good, may be I should go for other top performing scheme or dump the existing schemes or may be equity market as a whole is so risky let me stop investment.
Many investors have these thoughts. If you are one of those who have similar kind of questions or doubts, go ahead and read this blog.
Let me start with a beautiful story as Life's best lessons are learnt through stories.
There was a man who had four sons. He wanted his sons to learn to not judge things too quickly. So he sent them each on a quest, in turn, to go and look at a Pear tree that was a great distance away.
The first son went in the winter, the second in the spring, the third in summer, and the youngest son in the fall. When they had all gone and come back, he called them together to describe what they had seen.
The first son said that the tree was bent and twisted. The second son said it was covered with green buds and full of promise. The third son said it was laden with blossoms that smelled sweet and looked beautiful. The last son disagreed with all of them and said it was ripe and drooping with fruit, full of life and fulfilment.
The man then explained to his sons that they were all right, because they had each seen but one season in the tree's life. He told them that they cannot judge a tree, or a person, by only one season, and that the essence of who they are can only be measured at the end when all the seasons are up.
Similar is the story of Equity Market
Lets assume that there are 4 persons A, B, C, D who have invested in Equity Market at different times.
Now, you decide to invest in Equity Market and
speak to these people.
Person A - Equity market is very risky. Your capital may wash out, You should invest only in FD, PPF, etc.
Person B - Equity Market is hyped, the returns are almost same as any other investment instruments.
Person C - Equity Market is very much promising and will give very good returns in the next few months
Person D - Equity is the best asset class one can invest in and it will always outperform all other assets classes.
Now, you would naturally be confused as to which person's advice to follow. Let me make it simpler. Just like in the story above, all of them are right, because they have each seen but one season in the duration of equity market (assume - sensex for simplicity).
If we look at the Sensex Rolling Returns for last 39 years, it has its own cycle of winter, spring, summer and fall but not necessarily in the same order as the natural seasons.
Your Equity Share or Mutual Fund may not be performing well if you have just started investment a year back as sensex is hovering around 32000 to 36000 since last one year and likely to be in this range due to few state elections due this year and general elections due next year.
So like a Pear tree, Equity Market has to pass through different seasons to give you the desired fruits.
One should not judge that Equity is very risky or its the best just by looking at one season (cycle of returns).
Its always recommended to Invest according to your goals and diversify your investment to different asset class and review & re-balance portfolio periodically.
Read more about importance of investing based on your goals here Are you KYG (Know Your Goal) Compliant..?
Lets see the Sensex Rolling Returns for 5 years period.
We note that the Green flags have increased considerably compared to the previous table. Also, at certain periods the red flags turn into yellow / orange.
While there may be many other factors, Patience is the most important fertilizer for getting better fruits from the Equity Market.
Its important to understand that:
- Equity markets / Equity Mutual Fund are volatile.
- Equity markets / Equity Mutual Fund in the long run may give better returns than other asset classes.
- Equity markets / Equity Mutual Fund suitable for long term goals.
So be it a Pear tree, Equity Investment or Life always remember
If you give up when it's winter, you will miss the promise of your spring, the beauty of your summer, fulfillment of your fall. Don't judge a life by one difficult season. Persevere through the difficult patches and better times are sure to come sometime.
By: CA Nitesh Buddhadev & CA Mitsu Buddhadev
The authors can also be reached at email@example.com