The latest data by the Association of Mutual Funds in India (AMFI) indicates some new development on the investors’ front. As opposed to many investors swearing by Warren Buffett’s philosophy of staying invested to the last date, roughly 50 per cent of the investments made in mutual funds got redeemed in a year. This is a tad surprising considering how so many investors lose out on the opportunity to accumulate wealth due to freaking out of their investments so quickly.
Is long-term investing dead?
The magic of compounding attributed to huge returns from investments including mutual funds is possible only when one is willing to stay invested for a prolonged period. However, with the data pointing out how around half of the investors fail to stay invested, the question arises if the idea of long-term investing is now officially dead.
Speaking on what prompts such behaviour in investors, Sharan Hegde, Founder & CEO, The 1% Club said, “I understand that it is the jittery behaviour of investors and to an extent, some element of sub-standard levels of financial literacy. This problem arises when we are not taught about investing as a subject in schools or colleges and most people do not take investing (or any other subject) seriously after graduating even though it is such a critical topic.”
Elucidating on some investors’ erratic behaviour and their ignorance regarding the impact of long-term investing, Rishabh Parakh, Chief Play Officer, NRP Capitals said, “No long-term investing is not dead, though this does point does say something about the investors’ behaviour. If they redeemed it due to an emergency then it is evident that they didn’t do their risk profiling and invested without doing comprehensive financial planning, or else why would they need to dip into their mutual fund investments? If they redeemed due to market fluctuations then again, they didn’t stick to their original plan. Most importantly, long-term planning doesn’t mean that one must invest and forget for the decade or more to come. The meaning of long-term investing has changed in the past few years, given the dynamic setup we live in.”
“Investors must review and check their portfolios every two to three years and stay invested in the same schemes or stocks if they look promising based on their earnings and financial details. Doing this exercise every two to three years will help investors hold a scheme or stock for years together, thus, turning them into long-term investors,” added Parakh.
Explaining investors’ behaviour
There can be so many reasons why investors may decide to liquidate their investments. No doubt, they start with the plan and conviction to continue long-term. But, continued upheavals in the market combined with a lack of understanding of how markets work have caused many investors to feel restless and quit their investments.
Viral Bhatt, Founder, Money Mantra explained, “If you are thinking about redeeming your mutual funds, it is important to weigh the pros and cons carefully. If you need the money for an unexpected expense, then there is no choice but to redeem your funds. However, if you are selling your funds because you are worried about the market, you may want to reconsider. The market is always volatile, but over time it has always trended upwards. So, if you sell your funds now, you are likely to miss out on the gains that come later.”
Many investors are blissfully unaware of the benefits of long-term investing nor do they seek to avail of professional advice. Bhatt advised, “If you don't understand the long-term benefits of investing, then you may want to talk to a financial advisor. A financial advisor can help you understand the risks and rewards of investing and can help you create a plan that meets your individual needs. Here are some tips for long-term investing:
Start early: The earlier you start investing, the more time your money has to grow.
Invest regularly: Even if you can only invest a small amount each month, it will add up over time.
Reinvest your dividends: When you reinvest your dividends, you are buying more shares of stock, which will help your investment grow even faster.
Stay diversified: Don't put all of your eggs in one basket. Spread your money out over a variety of investments, such as stocks, bonds, and mutual funds.
Don’t sell in a panic: When the stock market takes a dip, it is tempting to sell your stocks. However, this is usually the worst time to sell. Instead, stay calm and ride out the storm.”
If you are clear about your financial goals, the first step you must do is to assess how much you wish to invest where, and for how long you wish to stay invested. Unless you are willing to be committed to your stance of investing for a continued period, there is no way you can hope to build on your earnings and create wealth for a financially secure future.