Gains In The Long Run

Under the present market conditions, it is even more important that a long-term investor pump in more money. Here's why
The sharp fall in the stockmarket this year has shaken the confidence of almost all kinds of investors—those who invest directly in stocks or those who do so through mutual funds (MF) or unit-linked insurance plans (Ulips). With markets down 50 per cent this year, the net asset values (NAVs) of most funds and Ulips have fallen to similar levels. Most retail individual investors are sitting tight and waiting for their portfolios to recover or at least break even. Not the best thing to do.
Why? Two reasons. One, your long-term financial planning should not go off-track because of short-to-mid-term economic issues. Two, for better returns, you have to not only stay invested but invest more.
For those who don’t put in fresh money, the reward will be even lower as and when the market rises. Say, the market moves up and gives a return of 20 per cent year-on-year for the next two years. The actual return on investment would still be negative. Therefore, investing fresh money now will considerably bring down the cost of investment (see Sow More, Reap More).
The gainers. For Ulip policyholders, the requirement is passive. Renewal premiums help to hold more units at the lesser NAV, reducing the overall cost of investment. Whenever markets move up, those holding low-cost units will benefit more than someone holding high-cost units. Stock and MF investors have to be proactive. It’s not the timing but the time one spends in the market that will determine the returns.
How to approach the markets now. Investing more at these levels will bring down the cost of investment for you as NAVs and stock prices are at lower levels. Make staggered investments and keep buying at different levels. In MFs, opt for large-cap diversified funds like Birla Sun Life Frontline Equity or HDFC Top 200. For your stock portfolio, pick from Outlook Money’s recommendations (Nibble Now, 19 November). For stocks you already have, revisit financials and growth outlook of the stock and the sector and then decide on buying more at the present levels.
An upturn in the markets may still be a while away as the domestic economy is not throwing up good numbers and the global recession will, in all probability, take a toll on our markets as well. The markets, however, do react in advance. Retail investors can’t catch the bottom, as all previous experiences show. They enter the happy hour quite late. Staggered investing is the way to avoid such a ride and instead reap the benefits of low-cost investing.