Mutual funds crisis: Your ‘long-term’ investments going through short-term trouble

Your ‘long-term’ investments in mutual funds are going through some short-term trouble. As many as 94% of the 350 equity funds have lost money so far in 2018, bringing back memories of a painful 2008, when crashing markets drove out retail investors.

The latest stock market correction, triggered by oil on the boil, a depreciating rupee, the prospect of interest rate hikes and uncertainty about the 2019 general election outcome, has wiped out most gains clocked in 2018.

Clearly, these are trying times for the Rs 22-lakh crore MF industry, which has since 3-4 years benefited from household money finding its way into financial assets. Just 19 equity schemes, excluding sector funds, gave positive returns in the 2018 year to date. The 19 schemes, all of which fall into the index fund and ETF product basket, account for a merely 3% of the equity MFs’ total assets. This means most investors have seen some negative impact in their MF portfolio thanks to the 331 schemes, which have posted losses so far.

In terms of losses, the worst fund in 2018 - Sundaram Small Cap Fund - is down nearly 35% in a little over nine months. The best fund - Reliance ETF NV20 - is up 7.89%. But returns are an exception, and losses are more the norm in 2018. Your lumpsum investments in equity-linked savings scheme (ELSS) funds are down between 3% and 34% year to date. Large and midcap funds are down between 7% and 23%. Largecap funds are down up to 17%. Midcap funds have fallen up to 26% and smallcap funds have dropped in 13-35% range.

There is little respite for those doing monthly systematic investment plans (SIPs), even though the monthly contribution at over Rs 7,000 crore is helping equity funds control rising redemption pressures.

In fact, in many midcap and smallcap funds the returns of an SIP investor are lower than those of lumpsum investor.
“Markets have been volatile. But every fall is an opportunity for long-term investors. If investors are following asset allocation, they should not worry about such declines. Also, SIPs are designed for times like these. How can you buy low if you stop SIPs? Rupee-cost averaging factor helps you acquire more units when prices are low,” said D P Singh, ED & CMO of SBI Mutual Fund.

Less than 30% of equity assets have been held for periods greater than 24 months. This means about 70% of equity assets belong to starry-eyed investors who have entered the MF mart in the last two years attracted by historical returns. It is this large proportion who are most susceptible to panic if markets fall further. Radhika Gupta, CEO, Edelweiss Asset Management, said that old investors know corrections happen and the markets bounce back.

“New investors should know they are part of the journey. Stay invested and think long term, because corrections are a one-year or six-month episode, but goals for which you invest are long term. Corrections are also reality — if you experience them early in your journey, on the training ground, you are fortunate,” she said.

Aashish P Somaiyaa, CEO, Motilal Oswal AMC, said that it’s very normal for people to make equity investments for their long-term goals and it’s also normal for people to check NAV once in a while. There is enough track record precedence and logical calculations that makes one believe that some sort of double-digit return CAGR is what people expect from equities. 

“But concluding on the investment outcome basis past nine months or expecting that the CAGR will be a series of positive numbers with no variance is untenable. It’s part and parcel of equity investing that there will be periods of severe drawdown and periods of stupendous gain,” he said.

Equity investing is not for those whose expect absolutely melancholic investment life. Here there will be enough periods that will cause excitement or anxiety. “That’s why it’s said that equity investing is more about temperament and less about IQ,” said Somaiyaa.

When the markets started tanking in January 2008, investors were spooked. Redemptions poured in, taking the market further down. In 2008, markets fell by over 50%. Similar patterns emerged in 2011 and 2015 when the stock market dropped. In the last 10 years, markets have seen three years where negative returns occurred. If you look at annual returns from 1998 to 2018, there are years like 1998, 2000, and 2001 when markets fell in double-digit percentage. 

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But if you adopted the SIP route of investments, results are not poor. Value Research data shows that in the last 20 years, even the worst-performing SIP return is 10% CAGR, which is higher than any bank fixed deposit returns. The best SIP return is nearly 22% CAGR.

Source: DNA Money