Where investors go wrong...

Do we check what our apartment is worth on a daily basis? Do we get our jewellery out of the locker and calculate its current value every week?

Why then do some people keep track of the net asset value of their portfolio, everyday?

Equity investment ought to be treated as a long-term call, just as we would, property or jewellery.

I got a call from a regular client - let's call him Jai - asking if we had lost our touch in recommending mutual fund schemes. According to him, while the ones he had invested in three years ago had given 'fantastic' returns, he pronounced all the recent entries 'bad'.

I compared mutual fund performance of diversified equity schemes as of May 4, 2007. There are just 18 out of 166 diversified equity schemes that have beaten Sensex returns in the past 12 months.

That's really a pittance compared to 46 out of 78 schemes that topped the index in question, in the past three years.

Logically, argues Jai, all the schemes recommended by us should have been in that elite top 18. That seems just fine, but he looks on incredulously when I explain to him that 10 of those 18 schemes were ranked in the bottom half based on the past one-month's performance.

This is where investors as well as superficial advisors get it wrong!

Following best performing schemes in the past three, six, or 12 months does not guarantee superlative performance. It only ensures more earning to the distributor. So then, what does ensure a superlative performance?

Let me admit that I do not know.

And if anyone else professes to, they are lying.

Advisors though, must understand the investors' risk profile, as also the consistency of investment philosophy of the fund house. We may suggest investment in a mid-cap scheme for an aggressive investor, ready to take the associated investment risks, only to find the fund morphed to a large-cap fund when the going gets tough.

An analysis of the top 18 performing schemes in the past one year reveals that nine of them have a corpus of less than Rs 250 crore (Rs 2.5 billion) - less than half the average size of all diversified equity schemes. Three of them are less than Rs 10 crore (Rs 100 million) in size - making me wonder how many retail investors have really benefited from their performance!

The simplistic reason is really that the Sensex since last May (end) has risen by 34 per cent while the mid-cap index lags behind at a growth of 12 per cent. And we know mutual fund schemes have reaped the benefit in the past 3-5 years by investing in mid-cap stocks.

If your financial planner has understood your risks and recommended these under performing (in last one year) schemes, it may be prudent to stay invested.

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