Advisor Speak

8th November 2011

Creating wealth even when markets are flats
Mukesh Dedhia, Ghalla & Bhansali Securities, Mumbai


At a recent Wealth Planner workshop, discussions veered round to how difficult it is to communicate with clients whose SIPs over the last 4 years have yielded practically nothing in many cases. In response to this, Mukesh Dedhia pulled out some startling facts - of how investors have created significant wealth through SIPs even when markets remained stuck in the same range for several years. We requested him to write up this piece, for the benefit of the wider advisory fraternity, which is grappling with this among many other issues. Mukesh Dedhia is counted among India's leading IFAs and financial planners and is a Director on the Board of FPSB, India.

Simple principle of investing!

Investing in equities is not a kid's play. And it has been proven time and again that mostly investors are just kids with money. Many investors lack the discipline they should be following when dealing with the volatile market conditions.

The concept of investment and systematic investment planning (SIP) is known to all. The investor just behaves as a kid and sees the bear phases of the market as the monsters and gets scared. In fact, as known to all, when there is a fear in the market, you should be greedy and vice versa. But who really bothers to practice the same, when you see your investments in negative? The main problem of investors is that they want to follow the herd mentality and just react in the similar fashion to that of the indices. An investor feels safer when the market has already peaked out rather when the market has observed a correction and has bottomed out.

Don't forget, someone's sitting in the shade today because someone planted a tree a long time ago. Due to the reverse fear-greed ratio, many investors burn their hands in the equity markets and never come back to the equity markets again, hence never sit in the shade. Why is that so? It's a herd mentality, "Sab jaate hain toh hum bhi jaate hain!" This is the testing time for the investors. This is the time when a smart investor makes money.

It may sound cliched, but equities are the best option for wealth creation. But unless you are a professional or have any professional guidance, direct investment in equities may ruin your finances as equities are also fraught with risks. Hence a SIP in mutual funds serves as the next best tool for equity exposure. When markets are bullish, investment decisions can hardly prove wrong. But the true test is to see how a fund withstands a turbulent market. A good fund is one that will give above average return consistently over long periods of time. Do not take yearly results too seriously. Instead, focus on four or five-year averages.

Many schemes have given more than fair returns if compared to their respective indices for the same time horizon. In order to support my statement, I would like to show you the actual returns earned after investing for a longer period and has also outperformed its benchmark.

Consider, if you started your investments of just Rs.1000 on a monthly basis in lets say Franklin India Prima Plus and HDFC Equity Fund in Dec'94 and Jan'95 respectively. Then the index saw a bull and bear phase, but you were brave during the bear phases as well and didn't miss out on the opportunity to continue SIPs and gather more units.

At the end of 1994, the Sensex was hovering around 3900-4100. 7 years later, by the end of 2001, it had seen a peak of 6000+ in early 2000, followed by a crash and was in the 3200-3300 range by the end of 2001. After 7 years, the market was actually lower than where it was in 1994.

However, after 7 years of SIP investments, when the index was showing negative absolute returns, you were quite relaxed and laughing all the way as your schemes had not only out performed the benchmark, but were giving very decent returns. Kindly see the tables given below: ( Loads not considered)

Franklin India Prima Plus


HDFC Equity Fund


Hence, looking at the implausible returns over this time horizon, we get to know that investing for a longer time horizon in a good fund can fetch you good returns . The simple principle of getting better rewards on investments is to keep your holding period long.

- Mukesh Dedhia, Ghalla & Bhansali Securities, Mumbai

To conclude....

Mukeshbhai's analysis can hopefully give you many talking points when you meet dejected clients who are still waiting for their SIPs to show healthy returns. There is another set of useful information that he shared - even if your clients started SIPs at market peaks, and continued with their SIPs through the crash that followed, they made a lot of money by the time the market eventually came back to the same peak level - years later. The underlying message is this : even if markets remain range bound for some years ahead, helping your clients to stay on course with their SIP investing strategy is perhaps the best way you can help them create genuine long term wealth.