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The Flaw In Long-Term Mutual Fund Investments Surfaced By A Virus

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If you are a young investor, this may be your first life experience of intense volatility in the markets. India VIX, a volatility index based on the NIFTY Index Options, rose to its highest level since November 2008 on Thursday, a 12-year high.

While there are significantly lesser number of coronavirus infections and deaths reported in India, our stock markets have definitely faced the same degree of impact as any other major country.

The Flaw In Long-Term Mutual Fund Investments Surfaced By A Virus


 

The argument in favour of long term equity investment

Amid the existing economic environment of panic, there are several interviews with mutual fund managers or wealth managers surfacing in the media.

While some are advising you to stick to your SIPs (Systematic Investment Plans) right now so that you do not convert your notional losses to actual ones, some others look at it as an investment opportunity to make lumpsum buys and ditch your SIP.

Either way, their advice is always that if you invest with a long-term perspective of 5 to 10 years, it shouldn't matter because any losses you may make would be recovered with "decent" gains by the end of the term.

Why is the argument not fully justifiable?

The long-term investment advised is presented with historical gains of at least 10 percent in 10-years time. But a lot can happen over a period of 10 years and no two decades are the same.

A change in Indian household savings patterns has also contributed greatly.

Back in the 90s, a majority of household savings would be made in government-linked schemes or bank deposits rather than stocks. It was also just the beginning of liberalisation of the Indian economy.

In the 2000s, the government actively promoted mutual funds investments to increase participation of domestic investors in Indian markets (which in turn helps the economy).

Furthermore, technological advancements in the past decade, a rise in middle-class income and increased participation of the private sector in mutual fund business have transformed how we save.

Almost everyone you know has a SIP, mostly an equity-oriented one (thanks to sec 80C tax benefits on ELSS) to save for financial goals like child's education, house purchase, car purchase or for a child's marriage.

 

There was a boom in cash inflows into the markets, that benefited the economy and gave good returns to the investors as well.

Additionally, heightened interest among foreign investors in emerging economies like China, India, other South Asian countries and Latin America, drove market indices to new highs.

If you were to then compare the investment made in the 90s to 2019, gains would have been significant to support the argument that long term investments in equity mutual funds are good.

But if a parent had started a 10-year SIP in 2010 that was due in the current scenario, that is in March 2020, his/her investment would not have made any gains because of the dramatic drop in the markets.

Even Warren Buffet, the ace long term investor who turned his investments to billions, said in an interview with Forbes that there was an element of luck involved in his success. Being born in 1930, his investments timed well in the "soon to be a very rich capitalist system" of the United States and paid off.

The point is that markets are unpredictable and there is no way of knowing what other political, economical or health risk is in store for the world or India in the next 10 years.

Your mutual fund company may assure you that they have your best interests in mind but even they cannot estimate if or when the next tragedy will strike.

The parent in the above example may have saved his/her savings with plans of sending his/her kid abroad. With the Indian rupee touching an all-time low of 75/dollar and next-to-no gains from the 10-year SIP, the "mutual fund sahi hai" argument cannot be favoured. While your fund manager may have warned that these investments "are subject to market risks," it is ultimately your money and your responsibility or loss.

What can you do?

Note that this is not an advice but an opinion that a fixed time frame may not be ideal for any market-linked investment. While eventually, the losses will be recovered, SIPs could limit your opportunities to withdraw sooner or hold on longer.

You may probably want to re-consider how you invest. Unlike an FD or PPF, there are no guaranteed returns on mutual funds. For Equity or equity-linked investments, it is better to keep track of the gains and set a target. Exit the investment when you have achieved your target (say of 10 percent returns).

Also, do not place all your savings in equity-oriented instruments but rather diversify into other asset classes including conservative tools like FDs or government schemes.

Disclaimer

The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.

Read more about: mutual funds coronavirus savings sip
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