Mutual funds in India have created an interesting phenomenon. They have worked as a cushion for India’s equity markets. A steady flow of money into systematic investment plans or SIPs provided the necessary liquidity for the market. The mutual fund industry has aggressively marketed the importance of regular investing. Many of you have seen that and started your equity investment journey.
It was all fine up to April 2020. However, panic set in as stock markets witnessed volatility and share prices tumbled. A period of uncertainty ruled over financial markets due to the pandemic. Varying estimates on future growth confused everyone. To add to that, the Reserve Bank of India refrained from making any forecast for economic growth. That is not a good situation.
Mutual funds sell new units to investors and allow existing ones to exit through redemptions. The net amount of that each month used to be a cool Rs 7,000 to Rs 8,000 crore. That money was available every month to mutual fund managers to pick quality stocks at low prices. It matters as foreigners moved to a panic mode and adopted a ‘risk-off’ strategy exiting major emerging markets.
In June 2020, the monthly ‘cushion’ dropped to Rs 241 crore. A lot of you have jumped the gun and pressed for redemptions. The reason could be a loss of work or any other financial distress. Even then, such a low net inflow of funds is not because people have stopped their systematic investment plans.
New purchases of mutual fund units are higher in June 2020 than in May 2020. The real problem is the redemption amount. It is the highest in a long, long time. That means that people have pulled out old money from equity markets.
Lesson No 1
Equity markets witnessed volatility since the lockdown in March 2020. Benchmark indices like the S&P BSE Sensex and the NSE Nifty fell sharply in April 2020 but bounced back smartly in May and June. Many of you who pressed the redemption button, missed out on the rally after the sharp collapse.
Had you stayed put, you would have picked up mutual fund units at a low price in April 2020 and added fewer units in May and June to your kitty at a higher price. Your investment so far would have got a leg up. It is important to stay invested and ride through multiple market cycles to make any meaningful amount of money.
Lesson No 2
Equity investing is not for the short-term. If you need the money in the next two to three years, you must not put it in equity markets. You are better off parking it in a debt or liquid fund. Take a step back and have a look at your income and expenditure going forward. You may want to figure out the money you do not need immediately. Invest an amount each month that you can afford to ignore for the next 10-15 years.
Lesson No 3
As you pull out money now from your long-term savings, your ability to benefit from the power of compounding diminishes—a significant impact that kicks in only after the tenth year. A cut in the corpus could leave a smaller amount in your hands when you get to your financial goal.
A sum of Rs 10 lakh invested today could become Rs 25 lakh after ten years if you assume a compounded rate of 10 per cent. However, if you cut the amount invested now and put the money back later, you will lose the compounding effect and have less money at the end of 10 years.
Lesson No 4
Just as many domestic investors turned sellers, foreign institutional investors turned net buyers in May and June 2020, according to the data compiled by National Securities Depository Ltd. The buying was the highest since November 2019. They probably see signs of improvement in India’s macroeconomic environment from March and April lows. Falling imports mean India is likely to report a current account surplus for the first time in five years. That is good news for the Indian rupee as it is expected to remain stable. Expect foreigners to stay put.
Rs 25 lakh
This much you could have earned after ten years on a sum of Rs 10 lakh invested today, if you assume a compounded rate of 10%