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volatility blog

03-AUG-2019

Author: Team - Edelweiss Partners

As the equity markets experience a phase of consolidation, it is indeed turning out to be challenging for the retail investors to stay invested with their portfolio. Recently, retail investors are getting multiple communications regarding the changes in the name, fund objective, expense ratios etc. Concurrently, the regular account statements are making them notice the negative returns for the transactions in the recent months. It has been an equally interesting experience for the retail investors who have recently started to invest in the markets. For the most part of 2017, equity markets were going in a single direction – only higher and higher. As such, equities were being considered as a risk-free asset class to invest in. However, the recent consolidation coupled with short-term volatility has been making the retail investors nervous and one question is generally coming out which asks if MF investments must be redeemed to stop further losses?

If we are to answer in a single word, it would be ‘ No’. It does not really make sense to redeem your investments, especially when the equity markets are down. In fact, such volatile times present great investment opportunities for the investors, as the most of the mutual fund schemes enter a reasonable valuation range. Just in case this short-term volatility is making you fearful, we have some interesting data for you :

Returns given by S&P BSE Sensex

1-year

3-year

5-year

10-year

Period of Data Analysis

1st January 1980 to 31st December 2017

No. of Cases for which data available

38

36

34

29

Periods when S&P BSE Sensex gave Negative Returns

10

4

3

0

Percentage of Negative Returns

26%

11%

9%

0%

CAGR Returns since inception

16.06%

 

We analysed the rolling returns given by S&P BSE Sensex since its inception over different investment horizons and noticed that the probability of negative returns reduced as the investment horizon increased. Further, inspite of BSE Sensex giving negative yearly returns 26% of times, it has given an overall CAGR returns of 16.06% and had you invested Rs. 1,00,000 at the inception of S&P BSE Sensex in 1979, it would have turned into Rs. 3.68 crores in just 38 years.

For making a rational decision to hold or redeem an investment, the decision making should be based on the following parameters:

  1. Is it just your scheme which is underperforming or is it the overall market sentiment that is bad?
  2. Is your investment still a good choice in its category and will a new investor buy this
  3. Have you achieved the goal for which you made this investment?

Let us discuss these in detail below:

  1. Continuous Underperformance of your Scheme

When your MF scheme is continuously underperforming the benchmark index or other funds in your portfolio, you must consider exiting the fund for investing the same in a better scheme. However, make sure, the decision to redeem the investment is based upon long-term performance and not on short-term underperformance.

  1. Change in the investment objective of the Scheme

Recently, certain funds have undergone reclassification in their investment strategy and investment objective due to some changes in SEBI regulations. Investment decisions are indeed after due consideration of the investment objective and risk profiles of the mutual fund schemes. So, when a large cap fund shifts its investment horizon to invest in small cap shares as well, you may consider redeeming the fund if it does not fit your risk appetite or financial planning. Please note that exposure to small cap stocks is a high risk high return proposition.

  1. Achieving the Financial Goals

It is always good to link your financial goals with regular investments. One must plan for the short term and long term goals and make systematic investments to fund these goals. These goals may include planning for your Europe travel, buying a car, child’s education etc. One must invest in a diversified portfolio systematically to build a portfolio matching the amount and tenor to fund these goals. So, once that investment objective is met, one may consider redeeming the investments to fulfil the desires and plans linked to that goal.

We must never forget that an unfavourable market is bad for a seller and good for a buyer. Therefore, choose to realign your investments if further purchase is not possible. Redeeming your investments means taking away an opportunity to generate better returns from your money. So, in simpler words, redemption means your money will not make money, and that is not a Good idea! To add on, an early redemption can further eat into your existing returns through exit loads and taxes.

Edelweiss Partners offers you an online mutual fund platform that offers a comprehensive bouquet of Mutual Fund schemes across categories and fund houses. It also provides access to the online transaction platform, research reports, expert analysis, fund recommendations, and financial planning tools. www.edelweisspartners.com shall help you take the right decision with the right execution platform.

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