I was listening to CEO of a fund house last week. He said that when he compared performance of different type of debt funds over a 5 year period, the performance is almost the same though in the shorter tenure, some scored over the other. The inflows have always chased the current performer or fund type (example: dynamic bond fund, income fund) fancied by the market but the results over a 5 year period shows no superiority of one over other.

Any mistake made in timing while moving from one fund type to another resulted in sub optimal performance than what each category has delivered over the 5 year period. He further opined that even for debt funds, it seems wiser to stay invested in a diversified debt fund for not less than 5 years than chasing short term, floating rate, income funds etc. and trying to time them.

I sat with a satisfied smile on my face. We’ve always made it a point to completely ignore the fund managers commentary on debt market, whether duration or accrual is good, is it good to enter G-Sec for a rally etc. They are forced to make forecasts almost on a monthly basis and inflows and outflows keep changing based on the direction they provide. Assuming all the calls they give are correct, which is not the case as recent instances have proved, despite so much activity, the returns an investor make over an interest rate cycle is same as staying in a diversified debt fund for not less than 5 years.

You may know Peter Lynch, one of the best mutual fund managers who managed Fidelity Magellan Fund and produced an outstanding performance. He once said that more than 50% of the investors in his fund lost money despite it being a superior performer. Reason? Inflows were more after few good quarters and outflows were more after few bad quarters.

I’ve often cited Dalbar studies which compares investors’ returns versus investment returns. When a fund,over a 10 year period, gives 18% returns, the investors also should have also made the same. But this rarely happens in a real life scenario. Investors invest more when the markets are high and redeem more when the markets are low. Added to that they keep chasing performance. A good fund is ditched because it had a bad year. A risky fund or not so good fund but which shows recent performance gets lot of inflow. All these ensure that investors as a group earn less than what the funds provide. In many cases, people actually lose despite markets and funds doing well over a period.

By doing the following you would do well than most other investors.

1) being systematic in equity investments irrespective of market cycles for not less than 10 years

2) investing lump sum when markets are low

3) rebalancing periodically especially when the markets are extremely pessimistic or euphoric

4) having investment tenure of not less than 10 years.

Is it that simple? Yes. Why most people then don’t do it? It is not the question of intelligence but sound temperament. All the articles I write, share with you, sms quotes etc. is towards positively reinforcing this temperament. I’m glad that we’ve been blessed with clients who share our thought process.

We prefer inactivity than constant activity. Inactivity can be due to understanding and temperament. Inactivity also can be due to sloth and inefficiency. Our preference for inactivity is due to understanding. When you are inactive positively you’ll also know when to act decisively.

I was abroad when the Lehman crisis happened during 2007. I didn’t allow the thoughts to disturb my travels. When the markets were falling in 2008-09, I made use of the opportunity to significantly increase my equity investments. Those of you who are our clients then would remember, how we repeatedly asked you top up your SIPs with lump sum.

In investments, it is enough if you do simple things regularly. No need for any extra ordinary activity. When an opportunity provide itself, which happens if you stay across market cycles, we can take deviation from routine and do what is appropriate for the situation.

Most investors buy when things are euphoric, sell when things look bleak and never participate in asset creation on a disciplined and regular basis. They also keep chasing fads, fashions and latest performances.

By doing what you are doing now, you would be both wise and wealthy. There is a greater probability of sustaining wealth if it is built through wisdom. These seemingly simple things would help you beat many sophisticated models and experts. You’ll do much better than many other investors. I’m 100% convinced. Hope you too.


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