MUTUAL FUND ROUTE TO EQUITIES- DO NOT IGNORE SIP ROUTE

Investing in equities has always been a matter of considerable debate. We look at the indices and draw quick conclusions. For instance, we saw the BSE Sensex at 20,000 in 2008 and in 2013 we are still there. So we conclude that equities did not give us returns. This happens to us because this is a measure from one fixed point in time to another. It also assumes that we simply put money in to equities in one go and wait. This means that we are being subjected to the vagaries of market timing. If we were great at market timing, we would have bought at 8,000 index and sold at 20,000. Alas, we are not blessed with this as foresight. It is only in hindsight that we can draw these conclusions.

There are two methods of investing that I like. One is to keep target prices for buying my stocks and buy when the stock hits that price. It may happen or it may not. Also, it is possible that the stock may still seek lower levels.

Given that markets keep fluctuating, the much talked about SIP or “Systemic Investment Plan” is probably a good way to invest in to the markets. Let me take two of the oldest equity schemes that I think are well run and see. One is Franklin Blue Chip Fund and the other is the HDFC Top 200.

Let me give below some numbers;

.......................... 1 year ..... 3 years ...... 5 years ....... 10 years ..........

Point to point return

HDFC Top 200 3.01......... 0.88 ......... 21.30 ........ 20.76 ...........

Franklin Blue Chip 3.14......... 2.74 ......... 20.53 ........ 18.68 ............

BSE Sensex 7.51 ........ 2.12 ......... 17.97 -------- 15.20 ............

(These are annualised returns, in percentages. I have taken 1st December 2003 as start date)

It does look like the last three years, we have not got much return and that both the funds could not match the index returns in the last one year. So, can we say that mutual fund investing is pointless or equity investing is not all that hot?

Now for the same periods, let us look at what SIP (monthly on the 1st of each month, we invest equal amounts) would have delivered:

SIP Returns

For the latest ----------- 1year ....... 3yrs --------- 5yrs --------- 10yrs ............

HDFC Top 200 13.34 ------- 7.28 --------- 10.78 --------- 15.74 ............

Franklin Blue Chip 14.16 ------- 8.63 --------- 11.55 --------- 14.27 ............

NIFTY ETF(Benchmark) 17.57 ------- 9.42 --------- 10.03 --------- 11.30 ............

(Annualised percentage returns for equal amount SIPs starting December 1st )

Does this not change the perspective radically? The main problem has been our paying too much attention to the noise and trying to put money in to the market when everyone is buying? We tend to just put money once or twice when the noise is the highest and then suffer because our timing was wrong?

Whilst this strategy cannot deliver big returns, it also prevents big losses. The important thing is to have the discipline to keep on going at it. Treat the SIP amount as expenditure rather than a decision point each time. And I would urge long time frames- ten years or longer. As I keep saying often, investing in equities should be with money that you do not need in a hurry.

Whilst opting for an SIP, I would prefer to keep away from thematic funds or sector funds. I would rather focus on diversified equities. There is also an option to pick on the Exchange Traded Funds on the Nifty or the BSE Sensex. The advantage of the ETF is the fact that it is an automated process and does not have a fund manager bias in stock picking. Also, as the size of each fund grows larger and larger, beating the index gets harder.

The other obvious advantage of the mutual fund return is the tax break on the returns. So whilst comparing it with bank deposits or fixed income, keep this in mind.

One interesting data thrown out from the table above is that the ETF in the Nifty ( the only index based ETF with a ten year history) seems to have done better in the recent period, besting the mutual funds in the three years and lesser time frame. Whilst it is too early to conclude, it could be because in the earlier days, it was easier to beat the index with a smaller corpus and now with the two funds having grown very large, the impact of small winners is not high. So, going forward, maybe the passive ETFs on the broad indices may be the best option.