Hold it close

In 2014, the Indian markets went on a roll after a long slumber celebrating not just the ascent of a new government in New Delhi but also the improving macro-economic fundamentals. The barometer of the economy, Sensex, delivered 25 per cent during FY15, which was a clear indicator that good times are here again for the markets.

The mutual fund industry was not to be left behind. This was evident from the increase in assets that rose from 09.39 trillion to 012.65 trillion between April 2014 and June 2015. A detailed analysis shows that during the same time period, the proportion of equity funds increased from 21.9 per cent to 30.9 per cent, while the share of debt-oriented funds showed a decline from 49.3 per cent to 43.1 per cent. This means that mutual fund investors have also joined the bandwagon of enthusiastic market participants to be a part of the India growth story. My endeavour in this column is to make investors aware of a few basic tenets that they need to keep in mind while investing in equity mutual funds.

Equity mutual funds as a category refer to funds that invest in stocks across the market capitalisation spectrum. However, there are different types of equity funds which are segregated on the basis of market capitalisation (large cap funds, mid cap funds and multi cap funds), sectors (banking, infrastructure, pharma), tax benefits (ELSS and RGESS) and global funds. Investors need to park their surplus in different categories of funds depending on their risk profile. For instance, if the investor’s risk profile is conservative, then it would be advisable to stick to large cap and multi cap funds. On the other hand, for an aggressive investor, taking an exposure into mid cap funds or even the sectoral bets would work better. These investors can also invest a small proportion of their surplus into global funds which will, in turn, help in the diversification of the over-all portfolio.

Equity funds can be either open-ended or close-ended. Investors can park their surplus into the same on the basis of their liquidity requirements. For the past one and a half years, fund houses have been launching close-ended funds, based on the attractiveness of stocks in the mid and small cap space. In this case, what we have been telling our investors is that, if there are open-ended funds that are working on these lines, it would be advisable to go ahead with them as they already have a track record. In addition to this, the surplus need not be locked in funds which are subject to huge market volatility.

From a taxation point of view, the capital gains on equity mutual funds becomes nil after a year. This does not mean that if investors have made the requisite return they need to exit from these funds. Equity mutual funds should be held for five years or more depending upon the goals of the investors.

One of the examples that I regularly use to show the advantages of holding on to a fund for a long time period is Reliance Growth Fund. The inception date of this fund is October 8, 1995, wherein the NAV was Rs10. In 19 and a half years, the NAV has grown to 0868, as on August 5, 2015. In short, if Rs1,00,000 was invested at the time of inception then the accumulated corpus would be Rs86,80,161.

A word of caution to investors is that although there are funds like these which have delivered superlative performance over a long period, there have also been laggards in the industry. Hence, investors should review their portfolios on a regular basis and take an appropriate exit call if the funds in the portfolio are consistently showing under-performance vis-à-vis their respective benchmarks.

As the time approaches for the goals that were set to be achieved, investors also need to take the following action to protect their hard-earned surpluses from the vagaries of the market. For instance, let’s consider there is an investor saving for his child’s education, which is a goal that needs to be achieved in the next 15 years. In this case, we would recommend that the investor holds on to the equity funds portfolio for 13 years after which it can be shifted to a debt fund. This is because an investment in a debt fund will protect the surplus from the roller-coaster rides that the market goes through on a regular basis.

To conclude, investors should not get swayed by the herd behaviour both in bull and bear markets. They should only make investments in equity mutual funds depending on their risk profile, goals and time horizon. To sum it up, if you as an investor, have a time horizon of more than five years, and the goal is wealth creation, then it is high time you rolled up your sleeves and started investing in equity funds. Dr Renu Pothen is research head at fundsupermart.com.