METHOD TO MADNESS OF INVESTING IN EQUITY MUTUAL FUNDS
I have been recommending investments in the form of Systematic Transfer Plan (STP) from Liquid to Equity for a very long time. Though equity is a 3-5 year product; my analysis of STP on weekly basis from April to Mid February every year has shown positive returns over the last 9 years. 3 out of the last 9 years, equity markets have gone negative from beginning to end.
Inspite of that all years have shown positive returns under the abovementioned strategy of weekly STP from April to mid February. Intention of redeeming before the Budget is that 8 out of 9 years post Budget, markets have corrected. Hence, it is more beneficial to cut your position mid February.
Inspite of an extremely volatile 2006-2007 & 2007-2008, STP on weekly basis in various equity funds have shown positive returns. We have also shown SENSEX to enable you to see the HIGHS & LOWS in respective years.Also, following table will show positive returns under the said strategy over the last 9 years as well.
Only exception to this analysis is the year of 2008-2009. Though this strategy posted marginal negative returns from April-Mid Feb under the strategy of STP, it was much lower ( -13.5 % p.a. in the case of Templeton Bluechip) than investing one time wherein the SENSEX went hugely negative by more than 45 % p.a. over the same period. This can be explained by two factors a) Markets worldwide are in bearish mode and Indian markets have corrected by more than 60% in one year ( from a peak of 21000 to currently at 9000) & b) there is no presentation of proper Budget as this year is the year of General elections. There will be Interim Budget rather than presentation of actual Budget. Hence, the phenomenon of markets going up in anticipation of Budget presentation is lacking in the current year.
- Example below is for Templeton Bluechip without entry load & SENSEX
|
Year |
STP (Annualised) |
Sensex |
||
|
01-Apr |
14-Feb |
Annualised Returns |
||
|
99-00 |
75.08 |
3,686 |
5,924 |
69.25 |
|
00-01 |
11.56 |
5,053 |
4,363 |
-15.57 |
|
01-02 |
21.53 |
3,566 |
3,557 |
-0.29 |
|
02-03 |
9.50 |
3,500 |
3,223 |
-9.02 |
|
03-04 |
64.98 |
3,081 |
6,012 |
108.53 |
|
04-05 |
25.40 |
5,741 |
6,679 |
18.65 |
|
05-06 |
34.96 |
6,605 |
10,087 |
60.12 |
|
06-07 |
18.32 |
11,564 |
14,010 |
24.12 |
|
07-08 |
9.27 |
12,455 |
17,767 |
48.64 |
|
08-09 |
-13.45 |
15,627 |
9,466 |
-44.97 |
Only solution to the said investment through STP going negative for the current year is to hold it for some more time. As the average cost of investing would be in favour of the investor; 15-20% jump in SENSEX from current levels should take the investor in positive territory.
I personally feel that :
- One must invest some portion in equity as an asset class
- This should be done systematically as discussed above
- Must cut your position mid February if you are in positive
- Hold on to the invested amount post mid February ( if returns are negative) till such time it comes back into positive territory. This according to me should be sooner than later due to the averaging concept working in favour of the investor
- This will instil discipline for investments as well as disinvestments. Most of the investors miss out due to their greed of earning more and more returns & in the bargain neglect to disinvest at right time
- This will give steady double digit figure returns YOY instead of giving superlative returns in one year and equally high negative returns in subsequent years. On the other hand it will protect you from huge downside in situations like current year in extremely bearish equity markets
Comments
Interesting facts. However, what does the investor do with the funds redeemed in Mid-Feb? Does that go back to the liquid pool and gets re-circulated from April via STPs?
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