Don’t get carried away by forecasts

The equity market continues to surprise investors, both pleasantly and otherwise. In the last two years, the market first lulled investors into believing that what was near 21,000 would become 25,000 soon and 30,000 in no time. And then came the big blow in the form of the global turmoil, and ‘sub-prime’ became a household term.

The market surprised investors on the negative side and we saw 15,000, 10,000 and very nearly 8,000 as well. For a long time investors were again lulled into believing that the story on investing in equity markets was over and done with and what was near 7,000 would ultimately end up at well below 5,000. Throughout 2008 and early 2009 investors have remained out of equity investing, be it directly in stocks or through mutual funds. And lo and behold the market has now started surprising on the positive side.

While it is necessary for us to try and gain and understanding of market movement over every possible time horizon, investors who are looking to build their wealth to meet their life goals over a long-term horizon do not need to be disturbed or carried away by near term market movements. They need to stick to certain basics on selecting the right kind of asset class — debt, equity, etc. — and the right kind of vehicle that can help them make profitable investments in the chosen asset class.

Who talks of losses


Rather than focusing on stock market movements investors’ energies will be well spent in determining what will help them generate right returns to achieve their life goals. It is quite normal for investors to get carried away with the reporting of movements in the Sensex or Nifty and associated number of percentage growth in various stocks and mutual fund NAVs.

It’s quite common nowadays to go to a social function and hear some people talking about how they doubled their money in some mid-cap in a matter of few days. But they do not highlight how they lost 50 per cent by investing in something else.

Consistency not a fluke


Mutual funds are the best example of financial democracy, as they allow investors to implement and review with high flexibility and frequency. Investors must definitely invest with mutual funds which are like service providers for managing their money through professional approach and here too they must focus on longevity and a healthy consistent average performance.

So, rather than focusing on the last three months, six months, two days and one year numbers, investors need to focus on average performance over last 5-10 years. Consistency does not come by fluke.

Consistent long-term performance is clearly the mantra for mutual fund evaluation and a risk mitigated mutual fund portfolio. Another critical determinant in mutual fund investment is transparency and access to information.

With the market suddenly looking northwards, getting carried away by fads are easy. Focus should rather be in analysing the fundamental strength and objectivity of the investment mandate. Investments should be made in avenues that offer high transparency and information support so that investors can participate in the upside and also not worry in the eventuality of a downside. Ultimately the power of knowledge means the power to take prudent investment calls.

The market may move up or down and will continue to remain volatile in line with its character. An investor, by ensuring due diligence-based decision-making, can ensure sustainable long term wealth creation.