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Secret to Investing Success

As we start 2019, we would like to reiterate the importance of sticking to your long-term investment plans.  We all tend to get influenced by the near term euphoria or the gloom as per the situation and decide on our investments.  We feel very confident to invest when things look perfect and hesitate to invest when the things turn little gloomy.   

But to be successful in investing, you have to overcome this euphoria or gloom mindset but rather be consistent.  As the great investors across the world have experienced and remarked, this consistency in behavior gives you a great edge, since data shows that most investors do not have this discipline and in the process their investment returns suffer. A classic example in the recent past, is the gross equity investments in mutual funds in Dec’18 have come down by 75% as compared to Dec’17 as the markets fell in 2018!! 

From the data we sourced from the AMFI website, we have found that by sticking to your investment plan, you would have got an average of 25% more returns over the past 5 years.  

Equity mutual fund flows between 2013 and 2018

In India, almost Rs 5 lakh crores have been invested in equity and hybrid equity funds between 2013 and 2018. 

Flows/Month Rs Crore201320142015201620172018
Yearly Investment Rs Crore-806056287848996857319602493286
Proportion of Flows-1.5%12.25%16.75%13.55%38.65%18.45%

Some interesting data about these mutual fund investments

Whenever the stock markets do well in a year, the flows increase tremendously and the reverse when the market tanks. 

  1. In 2017 when the markets were positive, investors put in a record 1.96 lakh crores
    1.  In 2018 with the market falling, investments dropped 50% to 0.93 lakh crores!

Consistent investing has given average outperformance of 25% over five years

Let us compare the results based on a Rs.5-lakh investment between 2013 and 2017 in two scenarios. 

In one scenario, we look at the results by splitting the Rs5 lakhs and investing it in the same proportion as the funds got invested in the equity markets by investors as above.  As the flows increased, we also increased our investment in the equity markets. 

In the other scenario, we just did our regular disciplined investing.  

The results based on investing in large, mid and small caps are given below:

 Portfolio ValueSensexMid CapSmall cap
Flow Based Investing604,683572,111480,153
Regular Investing680,992759,374647,156

Flow based investing in small caps would have given negative returns over five years. Consistent and disciplined investing has outperformed in each scenario across categories. 

Learnings for us as investors

Over this five year period, in each case, regular and consistent investing has yielded superior returns compared to flow based investing. 

Often these flows are impacted by previous year returns as well as macro news (crude oil, interest rates, GDP growth, inflation) and political news. One more reason for us to ignore all this and invest in quality funds in a consistent manner. This behavioral edge will give us consistent returns in the long run. 

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