For investors, year 2013 had more drama than Jai Ho (or Wolf of Wall Street - depending on your movie habits) and more nail-biting uncertainty than Gravity. However, it also provided the perfect opportunity for experiencing and learning about the behaviour of various asset classes, what returns you can expect and how to handle the turmoil. Let's see how.
- Year 2012 had ended with stock markets returning a whopping 28% and investors deserted gold for stocks.
- The first quarter of 2013 saw stocks declining and money moving to debt funds.
- This trend picked up pace in the second quarter of 2013.
- In June we discovered that debt funds were not "safe" after all. A sharp drop in government bond yields led to drop in NAV of debt funds. Investors panicked and debt funds saw massive redemptions.
- This was followed by another shock as liquidity tightened and even liquid funds took a beating. Suddenly there were no 'safe' investments.
- Amidst this turmoil came the rupee fall and resultant rise in gold prices. Headlines once again talked of people flocking to gold and to mutual funds investing overseas.
- With the currency market in turmoil and headlines about policy uncertainty, stock market volatility increased and flows into equity funds dropped. The year ended with the Nifty up a meagre 5.93% from January 1.
At each headline event, short-term investors deserted the asset class that lost value and sought refuge in something that appeared to offer better returns at that point in time. As you can see, it was an exhausting year for such investors.
How did long term investors fair in this turmoil?
Pretty well actually. For example, our Scripbox investors doing a monthly SIP in equity mutual funds averaged a return of 16% (IRR). Not bad for a much maligned asset class!
Comparable SIP returns (IRR) for the 3 core Asset classes in 2013 were:
Fixed Income (Largest Debt Fund): 5%
Equities (Nifty): 13%
In both Fixed Income and Equities, SIP investors managed to get returns close to long term averages.
So what should our learning be from the year gone by?
1. Develop a better understanding of risk: We'd do well to remember that, - Every asset class is volatile. There were sharp movements in all: stocks, debt, gold and even real estate. - Every asset class can incur loss of value. - The asset values usually bounce back to the long term average.
2. Match your investment duration to the appropriate investment: Some asset classes are good for short term, others for long term. Money required in a few months goes into savings bank or FDs; required in 1-3 years goes into debt and only longer term money goes into stocks.
3. Don't change long term decisions into short term ones.
- Debt funds still made sense despite losing money in June. If debt funds were the chosen vehicle for your long-term money, don't change it just because of an unanticipated bump in the road. Only remember to discard the assumption about debt funds never losing money. - Similarly, if you are convinced stocks offer the best option for long-term returns, don't lose heart because of short-term price drops. That's the nature of the stock market. But remember to discard the assumption that 1-3 years is long term.
4. Optimise returns within an investment duration or asset class. If you have one-year money and FMPs offer great returns for that period, choose them over FDs. Similarly if you are investing long term wealth into Equity funds (or debt funds), review and change your funds based on their performance.
We urge you to think about this as you evaluate investment options. Use the experience of 2013 to make the right decisions in 2014 and beyond.