A member of the Scripbox community of investors asked us how we could promote long term investing on one hand and recommend changing funds every year. Should he not hold on to the funds he bought for 4-5 years to get optimal returns? Isn't that what long term investing is?
This question is at the heart of what Scripbox does so we thought we would explain how the two are related.
We believe that investors must invest for the long term (Read: How Long Is 'Long Term') to benefit from investing in stocks or equity mutual funds. However long-term is not the only criteria for getting returns. The quality of the chosen investment matters even more. A poorly performing mutual fund (or stock) would not give you good returns, how much ever long you hold it.
Not all equity mutual funds are created the same and, more important, do not stay the same over time.
There is a wide difference in their performance and while the good ones should be held for long, the ones that don't perform need to be quickly replaced. The key, therefore, is to separate the idea of investing in the category of "Equity Mutual Funds" from specific "Fund" or "Scheme". What financial experts recommend is that you:
- invest for the long term in equity mutual funds
- monitor your investments, and periodically weed out relative non-performers.
- Don't get attached to any individual fund or scheme.
By investing for the long term we mean that , when you sell those mutual funds, you MUST reinvest the sale proceeds back into another (better) mutual fund.
This is the power of the Scripbox approach. You stay invested in Equity Mutual Funds for the long term but you periodically change the schemes you are investing in depending on their performance.
Let me explain this with an example:
- We started 2012 with 4 funds in Scripbox - At the start of 2013 Scripbox replaced one of the funds in its basket, - You had invested Rs 20,000 on Jan 2, 2012 and did not invest any money thereafter - Scripbox prompted you on January 1, 2013 to switch to the new fund
Here's what your holdings would look like at different points in time - depending on whether you continued to hold on to the old fund or if you chose to rebalance and switch to the new fund.
Please note that the total amount remains invested in equity funds - which is your objective. But dropping an existing investment in favour of one that has better prospects based on a scientific analysis, turns out to be a better decision.
Selecting which schemes to invest in, monitoring their performance. reviewing them and switching is all part of a disciplined investing process.
This sounds like a lot of work
And that's because it really is. Which is why very few investors are able to follow this discipline even though every financial expert recommends it. Those that follow it taste success.
.. but not for Scripbox investors
With Scripbox, all this complication goes away and the discipline becomes automated. All you need to do is login, review and confirm the basket switch and rebalancing. All the calculations as well as the activities of redemption and re-investing get taken care of by scripbox. We'll even remind you when to do it. (Related reading: Rebalancing – The Secret To Long Term Investing Success With Scripbox)