POW :: A lesson in long-term investing

AARATI KRISHNAN | Business Line | November 30, 2013|


Two of the earliest equity mutual funds to make their debut in India – Franklin India Bluechip Fund and Prima Fund – completed twenty years this week. And the wealth they have created for investors is something to sit up and take note of, at a time when faith in equity investing is at its nadir.

Franklin India Bluechip Fund, with an annual return of 22 per cent since inception, has grown every Rs 1,000 invested by its initial investors into Rs 53,000 today. Prima Fund, not faring as well, has multiplied the same investment to Rs 31,000. Both funds have soundly beaten the markets. The Sensex has managed a return of just 9 per cent per annum over this twenty-year period.

But what stands out at this milestone is not the returns managed by the two funds – there are other long-standing equity funds with equally good records – but how few investors have benefited from them. Data shared by Franklin Templeton shows that only 9,000 investors, of the total of 3.9 lakh who are invested in the Bluechip and Prima today, have stayed with these funds since inception. They alone are likely to have made the manifold gains generated by these funds. Indeed, studying retail investor behaviour in equity funds reiterates why most of us don’t have a good return experience. The bulk of the money in equity funds has flooded in at new market highs (1999, 2008) and flowed out during the dull phases (2001, 2013).

Funds aren’t stocks

There are three lessons from this experience for retail investors who have missed the Bluechip bus.

One, to really reap the rewards of wealth creation through equity funds, one must treat mutual funds very differently from stocks. While stocks may require market timing, obsessive monitoring and ‘profit-booking’ at the top of market cycles, good funds don’t.

Therefore, avoid the temptation to ‘book profits’ on your fund at what you think are market peaks. Also refrain from betting your shirt on a fund, at what you think is the beginning of a new bull market.

There are hardly any stocks, even bluechips, in the Indian context, which have generated a 20 per cent annualised return if held for 20 years. But there are half a dozen funds that have.

Jumping ship

Two, avoid the temptation to set a very high bar on your fund’s returns. Don’t abandon a good fund the moment it fails to top the return charts. With market cycles becoming shorter and more vicious, most investors monitor their fund portfolios very closely nowadays. Usually, when an equity fund slips from the top of the rankings, they switch to the top performer of the moment.

But the bulk of returns for the really good long-term funds come, not from riding the crest of the wave in bull markets, but by containing losses when the tide turns. Both Franklin Bluechip and Prima have had bad patches. But jumping ship based on a quarter or two of sluggish performance would have prevented investors from riding the recovery when they bounced back.

Growth matters

Three, if you want to benefit from the compounding effect of equities, you need to reinvest your returns efficiently too. Investors who opted for the dividend plans of Bluechip or Prima with an eye on the tax breaks are quite unlikely to have earned the returns that growth plan investors managed by allowing their money to stay in equities and compound at those high rates. Of course, there are lessons from this for the fund industry too. In India, even if investors in a fund stay with it through thick and thin, its sponsor or fund management team may leave it for greener pastures. This renders its track record irrelevant to long-term investors. Running down the list of 40-odd fund houses that operate in India today, there are barely any who have witnessed no change in their sponsor, ownership structure or fund management team over the last twenty years.

Bluechip and Prima too started out as flagship schemes for Kothari Pioneer Mutual Fund, before the fund house was sold to Franklin Templeton in 2002. Thankfully, the latter has resisted the temptation to restructure its global operations and rejig its Indian arm, as many other global houses have done in the last five years. And the fund’s core investment team has stayed with it since inception.

No doubt, to experience the true benefits of equity investing, Indian investors need to have the patience to soldier on through market cycles. But that also applies equally to the people who manage their money.

Source: http://goo.gl/VIwjsE

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