Reasons For Non-Performance

Many mutual fund investors in these turbulent times ask, “The Sensex is doing very well then why are my funds down in the dumps?” They do not realise that the invested funds do not mirror the Sensex, as they are in a different category to the Sensex.

Mutual Funds Track Different Benchmarks

Sensex 30 or Nifty 50 comprises large cap companies, in which funds of various caps are available. Not necessarily all have Sensex or Nifty as their benchmark indices. Some have Nifty 50 mid cap, some track Nifty Bank and some may have Nifty small-cap as their benchmark index. When we look at the market commonly we only see the bellwether indices, Sensex 30 or Nifty 50. They are both large cap indices and hence compare against the wrong benchmark if say we are comparing mid-cap or small-cap mutual funds to the Sensex or Nifty. In case of multi-cap funds, they may have the Nifty 500 as their benchmark! The debt funds have other benchmarks like the Nifty composite debt index. In short, what I mean to point out here is that whenever you are comparing the returns of mutual funds, choose the correct benchmark of that particular fund and do not compare the performance to Sensex or Nifty. Inevitably we will not get the correct picture.

The other dilemma that investors face is that despite the markets doing well, the funds chosen by them or their advisors are in the red. What they do not realise is that during the last meltdown their funds could have been down by a large percentile and now they are a few points down because the funds have covered lost ground and they are almost back to their invested value. The climb to the current level also vouches for the better fund performance. For example, assuming the worst fall of a particular fund was 15 per cent during down market phase and during the up market phase it is down by two per cent. Some investors will be very disturbed thinking they have a laggard of a fund, however, in reality, the fund is a good performer because it has covered 13 per cent of lost ground in the period. Both these scenarios happened just a few months back from November 2018 till date, when most of the mid-cap funds were substantially down and now have recovered smartly even as you read.

During these volatile times, the returns of the fund swing widely, but at times like these one needs to diversify and do the right asset allocation. One needs to wait out or rather use the opportunity to invest in these troubled waters. In January 2007, just before the sub-prime crisis hit the US, Sensex was at 14,000 (high) points and after the sub-prime event it went down to 12,000 (low) and by the year end it closed at 20,000 levels and while I am writing this in mid July, it is at 39,000 levels. It only goes to show that over a period of time the market have given great returns provided the investors have stayed invested and put in their funds at regular intervals. It is very natural to panic and withdraw one’s investments but sitting on cash never helped anyone in the long run other than having regrets.

Being an investment advisor, I meet such people all the time who have regrets and say “If only I had invested during a particular period.” It is not possible to buy yesterday’s performance but it is never too late to start investing. The tricks to outperform the markets in the long run are:-

Invest regularly

Stay invested during turbulent times

Believe in asset allocation

Be amply diversified into market caps

Do not be concentrated into one particular sector or market capitalisation companies

Stick to the plan at all times

The above commandments will save your investments during turbulent times and will help you generate superior returns over a period of time.

The author is a wealth advisor and Founder,  Tangerine Ideas