Discipline--Key to Equity Investments

We at AIMS have always believed that equity is the best asset class in the long run. History is replete with numbers/figures to support our belief, as after all history does not lie.

Over the last decade, Sensex has given an annualized return of about 18%. The numbers of equity funds that have been around for that kind of time period have done even better. To give you a brief idea of the wealth generated by Mutual Funds since 01/11/2000 till 31/10/2010:-

Fund Name		Returns CAGR (from 1/11/2000)
DSP BR Opportunities Fund	:-	27.73%
DSP BR Equity	:-	27.68%
HDFC Top 200 Equity Fund	:-	32.12%
HDFC Equity Fund	:-	32.10%
HDFC Growth Fund	:-	25.46%
Reliance Growth Fund	:-	36.13%
Reliance Vision Fund	:-	32.60%

These kinds of returns can generate serious wealth without much of an effort.

Over the past 10 years, a saving of Rs 20,000 a month at typical fixed income interest rates would have left you with just Rs 36 lakh while a SIP in a typical equity fund would have left you with around Rs 1.20 crore. That’s the kind of differential that can change someone’s life for better.

However, you will hardly come across anybody who has realized/generated this kind of wealth by just being a passive investor! We get so worked up trying to predict the sensex level and try to ride every peak and bottom that we more than often forget the basic purpose of investing; whether it is to fund our children education, marriage, our retirement etc.

Rather it is an irony that we have come across far more people who have managed to either lose money or gain very little while investing in equity. Why is this so? If equity investing is such a wonderful thing, why aren’t the streets full of ordinary investors singing virtues of the stock market? We believe that the answer lies in the large gulf between the theory and practice of equity investing.

The returns as shown above can be yours if the investors follow but a simple rule, viz;

· stick to the straight and narrow.

· Invest in a mix of stable large to large-mid stocks;

· invest regularly to average your cost and keep investing for years and years, and

· most importantly, don’t stop investing when the market is down and don’t invest more when the market is up.

Most likely we just end up doing whatever our instinct tells us to do and that the theory remains without practice. We still get queries for SIP like:-“I’ve been investing in SIPs for more than a year, should I book profits now?”

Queries like these arise since investors still equate SIP investing in particular and equity in general with short term betting and thinking that 1 year is long term!

The fruits of equity investing are available to everyone, but we’ll have to figure out how to peel that fruit.