Many mutual fund investors are suddenly worried about the performance of their mutual funds. If you probe a bit, you would find out that they are actually worried about the never-ending debate about the economy and markets that has been going on for a while now. This is not to say that their schemes have given great returns – surely, their returns have been poor from their investments in various equity mutual fund schemes, but their worry is misplaced.
Why, did you ask?
If you look at the schemes they are worried about or asking whether they should sell, you would find that those schemes are indeed better performers in their respective categories. They have performed equally well in the previous years. And they also have been consistent performers over a long period.
So, why are these investors raising an alarm? One, their worries are triggered by all the talks about how bad the economy is doing and equally dismal forecasts for the economy. Add to that the new theme of disconnect between the markets and economic fundamentals, and you have the complete picture.
It is true that Indian economy has been going through a bad phase for the last few years. Even before the Covid-19 struck the country, the economy was in doldrums. The extended lockdowns to tackle the pandemic has added to the crisis. It is still not clear how long it will take for the country to pick up the normal pace of economic activity. Due to layoffs and career threats, individuals are likely to hoard cash and the recovery would be slow.
Now, all these factors will have a huge impact on your equity investments. After all, the companies will have to perform well for their stocks to do well in the market. However, this is not how the stock market works. Apart from the fundamentals, there are other factors at work here. The extra liquidity in the system is keeping stock prices up. Even otherwise, the stock market always price future happenings much earlier. So, the market may run ahead of the actual events. That is the reason why it is difficult to predict the market consistently over a long period.
To come back to the performance of equity mutual funds, most equity mutual fund categories have been performing badly since 2018 and 2019. That means before complaining about the performance of your scheme, you should check the performance of its benchmark and the category. You would find that even the benchmark and category did not have a great run. Sure, there would be few schemes that have done better than your scheme. You should not lose sleep over it. If your scheme has beaten its benchmark and category average, you are doing fine. Keep investing.
Another reason why some investors are waking up to their schemes bleeding for a long period is because they did not pay attention to the details when they started investing. Many investors in small cap and mid cap schemes are waking up to the fact that their schemes have been performing poorly in the last year or two years. As said earlier, most equity mutual fund categories have been doing badly in the last two years, and mid and small cap schemes too have been doing very badly.
You must understand that most of these schemes had a great year in 2017 and it is quite normal for these schemes to get into a lull period for a year or two years after a great year. That is the nature of small cap and mid cap investments. You have a year of super-normal profits, followed by a dull year or two or very bad year or two. This is how the returns get averaged over a long period.
All you have to do in the current scenario is to make sure that your personal finances are in order. That is you have a large emergency fund, health cover and life insurance cover in place. After that you should ensure that your schemes are in line with your investment objective and risk profile.