Mrin Agarwal Finnancial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra.
Credit: DH illustration
Of late, most enquiries around equity investments especially regarding systematic investment plans (SIP) are on investing in SIPs for short term periods of 1-2 years. Driven by good returns over the last couple of years, some investors believe the same performance will pan out over the next few years as well.
Based on previous market cycles, times like this, when lay investors make short term bets on equities, actually signals caution. Overconfidence precedes carelessness! It is appropriate for equity investors to take a reality check on their equity investments and investment behaviour.
Here are a few things investors can check to get their equity holdings to give better returns.
Firstly, have the equity investments been made for a financial goal or because markets were doing well and it seemed like a good time to make some quick money? All around one hears stories of fantabulous returns made in a short period. Tag a financial goal to all equity investments and have at least 7-10 years holding period. Investors who cannot do so should exit and invest as per their investment horizon. For example, if the holding period is 2 years, an ultra-short term fund or arbitrage fund would be recommended and not an equity fund as it can be very volatile.
Second, simplify the equity holdings. Investors tend to have too many funds. 4-5 funds spread across a large cap index fund, a midcap fund and a flexicap fund is all that a portfolio needs. Diversify within fund houses too to reduce overlap of stocks and to get a differentiated investment style. Allocate additional funds to existing funds.
Third, keep in mind a few things about equity markets. Markets will go up and down and do not give linear returns. Focus on what can be controlled like how much to invest, where to invest and remaining invested, over fretting about market movements. Long term investors gain nothing by checking prices/ NAVs everyday. Checking the portfolio on a half yearly basis is good enough.
Fourth, having a modest view always helps. Quick returns in the past are more luck than investing skill. Stock tips and influencer videos do not create long term wealth. Keep out the noise and do not get swayed by what everybody around is talking about. Tone down return expectations to an average return of 10-12% p.a. in the long term from equities.
Finally, keep the investment strategy simple. With equity markets doing well, investors seem to believe investments like stock baskets, equity trading, F&O etc will give better returns than mutual funds. There is no data to prove this. Further, individual investors do not have the resources to get the right information or the time required to micro manage direct equities. Mutual funds are best suited for individual investors.
A financial journey is a matter of choices and every choice investors make, makes their financial life.