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Dear Friends,
Many of the new investors who want to invest in the stock markets, they would prefer to invest in mutual funds. That's because they stand the best chance of seeing good long-term gains that deemed to beat the current inflation. But did you know that not everyone who invests in this sector, has not taken the full profits?
Yes...this is because, if you look at the historical situation, the average returns of equity mutual funds and hybrid fund schemes in the last 5, 10 and 20 years are lower than the average returns of the investors who invested in them.
Why is this? What did they do wrong?
According to a deeper analysis by Axis Mutual Fund India on the returns of the investors have earned over last 5, 10 and 20 years (up to 31st March 2023) through Lumpsum and Systematic Investment Plan (SIP) in Equity Funds and Hybrid Funds and average returns of these fund schemes over the period are as follows:
Accordingly, the investments made in equity funds over the past 20 years have yielded an average return of 19.1% per annum. During this period the SIP mode investors have earned an average return of 15.2% per annum and total return on investments stood at 13.8%.
Investments made in hybrid funds over the past 20 years have yielded an average return of 12.5% per annum. During this period, SIP investors have earned an average return of 10.1% per annum, while total investors have earned an average return of 7.4% per annum. A similar difference in income is found in periods 5 and 10 as well.
Axis Mutual Fund Company has analyzed growth option investments in regular plans invested through mutual fund distributors. Also, only open-ended funds that invest anytime and withdraw investment anytime have been considered for this study.
Biggest mistake that the investors do make?
Many investors act on the short-term performance of the market and pull out their investment. The objective of SIP investment in equity funds is to get good returns against the volatility of the stock market. But the biggest misconception of most investors is that stock market investments should not depreciate. People who are worried about the stock market due to its volatile nature and have followed SIP investments have seen good returns by investing more at lower Net Asset Value (NAV). Those who stopped in between witnessed very less profit.
Many investors have greedily invested in equity funds and hybrid funds after seeing the high returns in the last 6 months or a year. But in the short term, when the market suddenly falls and the value of the investment goes negative, many investors walk out with a loss.
Investors' greed and the fear are the main factors that reduce their returns.
How many people do keep investing till the end?
According to the statistics released by Securities and Exchange Board (SEBI) of India, among those who sold and cashed out mutual fund units in the last financial year 2022-23 are as follows:
- 50% sold within one year of investment;
- 23% who invested within one year and sold within two years;
- 10% who invested more than two years and sold within three years;
- 14% who invested more than three years and sold within five years.
This is just 3 percent of those who invested and sold units after five years.
Now we know why investors are not getting more returns- as they are not consistent in long term investment horizon.
So, what the investors should do?
A hybrid fund and equity fund can add 10-12% annual average returns slightly above the rate of inflation over the last 3, 5, 10, 15 years to add wealth over the long term. It is always safer to choose such funds for investment. If you invest on the basis of high returns in the short term, you will have to face losses.
Also, equity funds that invest only in corporate stocks, hybrid funds that invest in a mix of corporate stocks and debt securities have significant equity market risk. Therefore, risk-averse investors should invest in these fund segments based on their financial goals and investment horizon.
When our people invest in gold jewellery and real estate, there is no way out. The reason is that it is not obvious how much it has depreciated, whereas equity mutual funds have the facility to see what the investment is as of today, so if they see a loss or make a small profit, they exit it. Also, by linking investments with major financial goals like children's higher education, marriage, etc., the investment can be carried forward for the long term.
Note: Equity funds and hybrid funds should be invested only if the investment period is more than 5 - 7 years. It is also mandatory for first time investors and senior citizens to adhere to this.
So, as an investor keep in mind and stay with your investments and add on if the market falls to keep your portfolio at a longer horizon for a better returns to beat the inflation.
Happy Investment Journey ahead in this harder times of both the financial and crypto markets!!
