Don’t get distracted now

Stock markets and mutual funds have been testing investors’ patience for the last 18 months, from September 2024 until now. Equity mutual funds invest in stocks, so when we talk about stocks, we are also talking about equity mutual funds. Major stock market indices like Sensex, Nifty, Midcap, and Smallcap touched all-time highs around September 2024 and have been moving sideways in a range since then. This phase is testing investors’ patience. Is it normal for markets to move in a range like this? Has this happened before? Let’s understand.

From 2020 to 2024, stock markets delivered excellent returns over a five-year period. Many mutual fund schemes generated around 25% CAGR, which is very strong performance. After giving such high returns for five years, it is common for markets to slow down or take a breather. To understand this better, let’s look at the journey of an actual scheme from 1995 till today. This scheme was launched in 1995. Let’s assume 1 Lakh is invested at inception in the scheme.

First row: Calendar year

Second row: % return in the calendar year (Jan to Dec)

Third row: Market value of 1 L investment at the end of each calendar year (as on 31^st Dec each year)

Key observations from the above scheme’s journey:

i) The scheme has delivered strong long-term performance over the past 31 years.

ii) Across any 8–10 year investment horizon, the returns have generally been healthy and rewarding.

iii) Historically, the scheme has experienced 2–3 years of strong performance, followed by around 2 years of consolidation, negative returns, or range-bound movement.

iv) Importantly, after every lull phase, the scheme has rebounded strongly and delivered returns that more than compensated for the muted period.

v) In mutual funds, volatility is not a flaw. It is a feature that enables long-term wealth creation.

vi) During consolidation or lull phases, the prudent strategy is to continue SIPs and, where possible, add lump sum investments to benefit from lower valuations.

Coming back to our clients’ portfolios, even though the returns have been muted over the last 18 months, investors who have been investing for the past 10 years are still enjoying 17%–18% CAGR/XIRR. Imagine the potential impact on the portfolio returns when the broader stock market and the equity mutual fund schemes resume strong performance.

Now is not the time to get distracted.

Stay committed to your long-term investment goals and continue with your existing plans. Don’t get carried away by seeing other asset classes perform well. If you look at their long-term performance, most of them have not delivered consistent results over extended periods.

Constantly shifting from one asset class to another will not allow you to fully benefit from any of them. Also, no one can perfectly predict the right time to enter or exit an asset class. Trying to do so usually ends up hurting returns.

Most of the (99%) the information and market update that you receive is noise and only very little (1%) of it is signal. And of course, this signal is lost in the noise. I am here to help you stay the course and reduce the distractions.

Play the long-term game and stick to the right asset class for the long-term. It will work out very well eventually.

Disclaimer:

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs. This blog post is for illustration purpose only. Past performance may or may not be repeated in the future.