Investing for the long term (3-5 years) has been something of a problem for mutual fund investors. Even if investors buy the story that equities work best over the long-term, there aren't a whole lot of mutual funds that cater to them.
In the recent past we have seen some mutual funds correct this anomaly by walking the talk as far as long-term investing is concerned.
As we have outlined in an earlier article on long-term investing, mutual fund investors can consider investing in tax-saving funds. Tax-saving funds have a 3-year lock-in, which affords the fund manager the luxury to make long-term investment calls.
In a regular equity fund, constant redemption pressure and demanding investors breathing down his neck compel the fund manager to make investment calls that are not necessarily driven by long-term consideration.
The good thing is that fund houses have identified the problem of lack of long-term investment opportunities and have tried to resolve the problem on two fronts.
One is by promoting long-term investments in mutual funds through measures like waiver of entry loads on systematic investment plans (SIPs). To discourage investors from exiting SIP investments prematurely, redemptions within 12 months are charged with an exit load.
Some fund houses are getting more proactive and telling investors upfront the ideal investment time frame for a particular scheme. At least one fund house's fact sheet mentions very clearly the ideal investment horizon for each of its scheme; equity schemes of the fund house have a time frame of five years.
HDFC Mutual Fund has gone a step further and introduced a long-term equity fund. To be more precise, it has 'converted' an existing tax-saving fund -- HDFC Tax Plan 2000 into HDFC Long-Term Advantage Fund.
Of course, HDFC Mutual Fund could do this mainly because it has another tax-saving fund (HDFC Tax Saver) in its kitty. Since having two tax-saving funds does not really benefit a fund house in any way, and may even create confusion, the fund house has positioned the second tax-saving fund (HDFC Tax Plan) as a diversified equity fund that will make long-term investment calls.
HDFC Long Term Advantage has all the salient features of a tax-saving fund (ELSS) -- Section 88 tax rebate benefit and 3-year lock-in.
HDFC Long Term Advantage was launched in January 2001. It is among the better- managed tax-saving funds in the country today.
Over the long-term (3-year), the fund compares well with its diversified equity peers, and has stolen a march over all its siblings (HDFC Equity, HDFC Top 200, HDFC Capital Builder, HDFC Tax Saver), indicating that long-term investing does pay off.
Long-term investing delivers
| Equity funds | NAV (Rs) | 6-Mth | 1-Yr | 3-Yr |
| RELIANCE GROWTH G | 103.83 | 52.98% | 43.47% | 71.71% |
| RELIANCE VISION G | 76.86 | 40.46% | 23.32% | 70.09% |
| FRANKLIN INDIA PRIMA FUND G | 101.2 | 46.94% | 37.81% | 69.21% |
| HDFC |
45.58 | 51.16% | 47.57% | 66.17% |
| UTI MASTER VALUE | 28.42 | 41.89% | 26.00% | 54.75% |
| TATA EQUITY OPPORTUNITY A | 25.95 | 40.80% | 28.78% | 54.56% |
| HDFC CAPITAL BLD. G | 32.77 | 51.35% | 46.60% | 51.96% |
| HDFC TOP 200 G | 48.56 | 37.53% | 32.28% | 51.05% |
| HDFC TAX SAVER G | 58.56 | 57.58% | 50.59% | 50.94% |
| DSP ML OPP G | 24.24 | 38.04% | 33.66% | 50.93% |
Investing in HDFC Long Term Advantage Fund makes eminent sense for investors who have a clear investment time frame of at least 3 years.
Even investors who are not interested in or not eligible for the tax benefit can consider investing in HDFC Long Term Advantage Plan.
Given that it has a 3-year lock-in the fund manager has a free hand to select stocks according to the stringent stock selection parameters laid out by the mutual fund.
A fund that permits the fund manager to make long-term investment decisions not only stands a better chance of meeting your investment objective of long-term capital appreciation but is also likely to do this at lower turbulence in performance.
Combine this with lower portfolio churn which adds directly to the NAV return and you have some compelling reasons to throw your hat in the ring for long-term investing.