It has been seen that most investors always look at indices (Sensex and Nifty) in particular when thinking of investing in equity MF schemes. It has been seen if market is falling they refrain to invest and if market is rising they get tempted to invest.

One has to understand that there are two types of equity investors, one who wants to take advantage of stock price movement and other who wants to take advantage of future earnings of a company.

For the first category of investor the best route of making money is open demat account and do trading. They will play on market and price volatility of stock. The rise and fall in prices most of the time are influenced by certain short term factors or immediate impact of certain policy changes or macro economic variables. One has seen sometimes one is not able to understand the reason of rise and fall in stock prices but as we know these things are more or less sentiment driven and at times all logics and rational defies sentiment.

But we as investment advisor are more concerned about the investment decision making of second type of investor. If my objective is to see my wealth growing then one has to ensure that he adopts the surest way to see that happening. Now what is the surest way Sentiment or Fact.

If I know Tata Steel or Infosys or ACC are the companies who have good products, have growing sales and revenue, have good client base i.e. sound business and its performance as a Fact and then going forward one expects things to be good and expects the company to keep earning profits then one is sure that if one own those stocks directly or indirectly they will reap the benefits. In the short term market and prices react to sensitive news and effect is short lived but in long terms it is the future earnings of company that makes the valuation of stocks go up. Mutual fund is a long term wealth creation tool and in no way it can be assessed and analysed by short term market and price movement.

In an equity fund there is a portfolio of various companies. If at all an investor has to see he should see that the portfolio comprises of good companies stock. One way of looking is what is the proportion of large cap, mid cap and small cap in the portfolio. The more the large cap stocks the lesser is the volatility in return because again in long run large cap stocks are those which have been for years, have good business model, proven management, growing sales and profit.

Now you as an investor have to decide in which category you fall. Both have their own pros and cons but you should not get affected by the ups and downs in the equity market in the short term as you have chosen Equity MF as an investment vehicle. One is governed more by technical i.e day to day, intraday price movement whereas the second one is governed by fundamentals of the company i.e earnings and business.

Again we have to understand that in short term when market rises or falls due to any reason one has seen that other sector or companies stock prices also rise or fall in same or different direction from market but an investor is able to spot that but in case of Equity MF he takes the view of market direction which is again a bit irrational. If you look within an Equity MF portfolio some stocks might have fallen, some risen and some unaffected and that is what makes the portfolio movement proof in a big way. In short run the impact of price movement takes more sentiment into account than earnings but as the period of investment is longer earning impact is felt much more and sentiment impact gets slowly reduced.

Last 5 years have been a roller coaster ride as far as Equity MF return is concerned but here also if I take year to year or month to month return I find big swing but if I take a 3 or 5 year view the big swing is missing.

Even while you are reading this article you must be feeling why I am emphasising investment in Equity MF when recent past experience has been bad and not so encouraging news coming from newspaper, magazine at least for a year down the line. To counter your current mindset I will like you to answer yourself : (1) Historically which of the asset class has given best return in the last 5,7 10, 15 years or so, answer is obviously Equity MF is one of them along with gold and real estate (2) what I am looking from my investment, answer is obviously good return (3) if I am looking for good wealth creation some 5, 10, 15 …. years down the line then why I should be getting worried at stock market movement ( 4 ) should I look at debt instead of equity , obvious answer is yes if you plan to keep investment for less than 3 years but if beyond that then you are losing by not having invested in equity. One very common mistake most investors do is that being scared of suffering loss from Equity MF investment they invest in debt fund or bank FD for a 1 or 2 year period and then again put back in same type of product or continue being invested for long in bank FD. For them just see the returns for period beyond 5 years, it is just some percentage above inflation. One feels happy to get 12% bank FD return but they forget to look what has been the inflation at the same time, may be 8-10% so effective return has been 3-4%.

I would love to take any queries or answer any questions pertaining to this article or doubt regarding investment. Pl feel free to contact me at sinha.prakashranjan@gmail.com