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Importance of Long Term Perspective

One of our oft-repeated themes is that it pays to just remain invested in good funds or direct stocks with a long term perspective.

Recently Association of Mutual Funds India (AMFI) has released voluminous data on the holding periods of the different kinds of investors.

  • Looking at the total investor community (across Retail, HNI, Institutional investors) the % of Folios which are more than 2 years old has come down from 58% in March 2010 to 30% in March 2018 – such investors have dropped by half!! Most probably they are chasing performance, by churning from one fund to another.
  • In March 2018 more than 30% of the folios is less than 6 months old and half of the equity folios were less than one year old!
  • Only 22% of the HNI folios are more than 2 years old.

While there are some reasons which can be given for the above data (lots of money has come into equity over the past two years, easy of investing online, new fund classes etc.), the overall trend is consistent over the past decade – holding durations for investors are getting shorter.  This doesn’t augur well.  Majority of the investors will lose out in the long run by these constant churning.  Longer your hold, better your returns are!

Did this continuous churning help?

In the same time period of 2009 to 2018 instead of churning folios what would have happened if the investor had stayed in the same fund? We have more than 120 funds from large fund houses with ten-year track records.

The Average ten-year return for these funds is 13.5% with the worst fund delivering 8% and the best fund giving 20% returns.

Staying invested in a good quality fund for the long term generates tremendous returns. Even investing in an average fund would have given 13% over ten years.

This 13% return over 10 years translates in to your 3.39X in 10 years. Your Rs1 lakh investment would have grown in to Rs3.39 lakhs.

What does this mean for us

Equity as an asset class tests our patience and conviction at various levels. While there will be overall cycles in equity as an asset class itself with highs (e.g. 2009, 2017) and lows (e.g. 2008,2011) in addition we will see short term fluctuations in the actual fund/stock itself where we have invested.

Ignoring all this noise and staying invested in good equity funds through the ups and downs will give us superior returns.

Pick right and sit tight!!  If we have held on to the same fund for more than ten years itself we would be in a small minority in the market. This positions us very well for long term returns. Of course, now you can also save some taxes by avoiding constant churning of funds.

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!” – Jesse Livermore

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