How Long-Term Investments in Best Equity Mutual Funds Help in Goal Planning

To achieve many of these envisioned financial goals, planning well in advance and starting early is important.

One of my friends, Ritesh, an environmentalist shared his goal of buying a piece of agricultural land with me. He plans to buy this land, which currently costs Rs 50 lakh, in the next 15 years without taking any financial assistance from his family, friends, relatives, or bank. He intends to plant the rarest of the rare trees and plants on that land. Assuming the price of the land is likely to appreciate 8% per year on average for the next 15 years, he will require approximately Rs 1.6 crore to purchase it.

Now the question is, how should he build the corpus for meeting this goal?

Given that he has a time horizon of 15 years, and the expected appreciation in the price of land is 8% compounded annualized, systematically investing in equity as an asset class would be one of the only intelligent choices.

Over the last 15 years, India's bellwether index, S&P BSE Sensex, has generated 11% CAGR returns. If markets were to continue to generate similar returns for the next 15 years, Ritesh would be able to accomplish his financial goal. But for that, Ritesh will need to invest systematically every month, approximately Rs 35,000 over the next 15 years.

But had he started planning for this goal 5 years before, the monthly systematic investment required would have been around Rs 18,300. That's the advantage of starting early, which eventually even helps compound wealth better supported by a longer investment horizon.

That's why we always insist that our readers and subscribers start investing as early as possible. Time can be your good friend over the long run, and what is necessary on your part is following a judicious approach.

But unfortunately, when it comes to long-term investing, many people have these common myths:

Myth #1: Long-term may be uncertain, and gains made may erode - Well, these are individuals who do not believe in the idea of long-term investing. Instead, they believe in taking money off the table as it is made. But are you aware that some of the most successful equity investors, such as Benjamin Graham, John Templeton, Warren Buffett, Peter Lynch, and our very own big bull, Rakesh Jhunjunwala, follow a long-term investment strategy?

While there's nothing wrong in booking profit by not staying invested for a longer period, if you do it frequently, that is, indulging in trading, it could prove hazardous to your wealth and health. You need to invest in some of the best and most suitable investment avenues and give enough time for your investments to grow. The idea behind this is to buy right, hold tight, and ultimately your patience will be rewarded. If you frequently book profit and do not reinvest, it will limit the potential to build a bigger corpus, and then you may not be able to accomplish the envisioned long-term financial goal/s.

Myth #2: Time the markets (buy on low and sell high) - With some individuals, while they invest for the long-term, the focus is on timing the market (i.e. buying low and selling high), rather than 'time in the market'. But if timing the equity market was as simple as it seemed, everyone would have been wealthy. The fact is that no one has been able to master this art with 100% precision. Even a good trader is good only until his/her last trade, as the future is unknown.

Hence, instead of timing the market, investors should look at the margin of safety available and focus on 'time in the market', whereby it would aid compound hard-earned money and mitigate the risk involved in the journey of wealth creation.

Myth #3: Asset allocation is hocus-pocus and not needed for long-term investors - Some investors skew their investment portfolio to one particular asset class. In the last two years, I have come across individuals who have gone all gung-ho in equities, swayed by the exuberance and disregarded asset allocation. This could prove perilous. Instead of investing in one single asset class, it is important to hold a mix of equity, debt, and gold in congruence with your risk profile, investment objective, financial goal/s, and the time to achieve those goals.

Asset allocation can serve to be an effective strategy to diversify, optimise portfolio returns, minimise portfolio risk, aligns investments based on financial goals being addressed, and makes market timing irrelevant. For these reasons, asset allocation is the cornerstone of investing and should not be ignored.

Notwithstanding the above, when you choose investment avenues selection matters. In the case of mutual funds as well, while they are worthy avenues (sahi hai) for long-term wealth creation, paying attention to quantitative and qualitative parameters for the best scheme selection is vital.

If you invest in a popular scheme relying solely on its outperformance in the immediate past or overemphasis on its star ratings, you might end up investing in a potential underperformer. And remaining invested in an underperforming scheme won't help you multiply your wealth even in the long term.

Therefore, you should ideally invest in a scheme that has a dependable track record of superior performance across timeframes and market phases. Moreover, before investing in any mutual fund scheme, you must ensure that it follows well-established investment systems and processes.

Besides, you should also review your portfolio periodically, say once in six months, to ensure that your investments are in good health and you are on track to achieving the envisioned financial goal/s.

For instance, HDFC Flexi Cap Fund, which has a track record of 27 years, was once one of India's most sought-after equity mutual fund schemes in the flexi-cap funds category. While it has generated 18.5% CAGR returns (as of April 1, 2022) since inception, it is no longer the best flexi-cap scheme. Over the last five years, HDFC Flexi Cap has massively underperformed some of the newer well-performing schemes such as Parag Parikh Flexi Cap Fund.

HDFC Flexi Cap Fund has generated 14.4% CAGR returns (as of April 1, 2022) over the last 5 years whereas Parag Parikh Flexi Cap Fund, which was launched in May 2013, has fetched 21.5% CAGR returns (as of April 1, 2022). The since inception returns generated by Parag Parikh Flexi Cap Fund are 20.7% CAGR (as of April 1, 2022).

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We have formulated the 'Core and Satellite strategy' to invest in equity mutual funds. This strategy is followed by some of the most successful equity investors.

The term 'Core' applies to the more stable, long-term holdings of the portfolio, whereas the term 'Satellite' applies to the strategic portion that would help push up the overall returns of the portfolio across market conditions. The Core & Satellite approach helps you create an all-weather portfolio, i.e. portfolio that works under all market conditions. We believe this strategy, when correctly applied, can help you get the best of both worlds, that is, short-term high-rewarding opportunities and long-term steady returns.

The 'Core' holding should comprise around 60-65% of your equity mutual fund portfolio and consist of a Large-cap Fund, Flexi-cap Fund, and Value Fund/Contra Fund. Whereas the 'Satellite' holdings of the portfolio can be around 35-40%, comprising of a Large & Mid-cap Fund, Mid-cap Fund, and an Aggressive Hybrid Fund.

Holding an all-weather compact portfolio of diversified equity mutual fund schemes following the Core & Satellite strategy can help you:

✔ Keep emotions at bay

✔ Take advantage of the higher margin of safety and stability of large-caps

✔ Capitalise on the potential high growth opportunities of small and midcaps

✔ Reduce the need of churning the portfolio, especially the core portion

✔ Potentially earn higher returns over the long-term

✔ Mitigate downside risk

Moreover, to manage the volatility of the equity markets, you could take the Systematic Investment Plan (SIP) route to invest for the long term. SIPs will instil the discipline of making regular investments and help you build the desired corpus to fulfil the envisioned financial goal/s.

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For instance, a SIP in Parag Parikh Flexi Cap Fund has fetched an attractive return over the longer timeframes. If Ritesh had started a SIP of Rs 35,000 in Parag Parikh Flexi Cap Fund right from the inception of the fund in 2013, he would have built a corpus of Rs 98 lakh by now.

Finally, remember this always...

Do not ignore your Asset allocation when investing. Your risk profile, investment objective, the financial goals you are addressing, and the time to achieve the envisioned those envisioned goals should determine your asset allocation. Keep in mind, that following a prudent asset allocation holds the key to your financial wellbeing.

And the earlier you start investing with a meaningful sum, over the long-term you be able to build a larger corpus to accomplish the envisioned financial goal/s. Equity is one of the best asset classes to create wealth over the long term, but it is essential to follow a sensible approach.

Happy Investing!

Warm Regards,
Rounaq Neroy
Editor, Daily Wealth Letter