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57Equity Mutual Funds: Why Staying Invested For Long Term Holds Key?Aug-18-2020

Equity Mutual Funds: Why Staying Invested For Long Term Holds Key?

Blog by – Mr. Ashish Ajmera

Equity trading is one of the most popular means of wealth accumulation for investors. For retail investors, equity mutual funds have been a great tool to park savings on a regular basis for retail investors over last few years. Most of the stock brokers in India are providing the facility to invest in mutual funds via lump sum or through the systematic investing process (SIPs). However, there have been instances when abruptly pulling back from investing regularly erodes the long term investment performance of your portfolio. This will not just hamper your finances but also make your hardly saved funds lose value over a period of time. Hence, staying invested despite turbulent economic conditions and cautious outlooks is critical. This is where having access to one of the best mutual fund advisory services matters a lot. The current phase of Covid-19 is an excellent case in point. Let us dig deeper and understand the benefits of staying invested in mutual funds for a longer time horizon. 

In equity mutual fund trading, behavioral bias is a very critical factor. This means that as an investor, you tend to get influenced by the decisions taken by others. For instance, latest data from the Association of Mutual Funds of India (AMFI), states that inflows in equity mutual funds are sliding despite a sharp recovery in benchmark equity indices over last few months. The domestic equity mutual funds saw an outflow of Rs 2,480 crore in July, recording their first withdrawal in more than four years. What does it mean and could this trend continue? Simply looking at these figures, there is a possibility that many of you may think about reducing your investment in mutual funds or stopping it altogether. 

However, remember that the major trends in market may not be indicative of your investing dynamics and your long term financial planning. While there has been a decline in the inflows of equity mutual funds, keep in mind that on an aggregate basis, the domestic mutual fund industry witnessed a net inflow of 89,813 crore across all segments in July 2020, which was higher than Rs 7,265 crore in June 2020, indicating sustained increase in inflows in the Indian mutual funds industry. This has also prompted stock brokers in India to offer a number of insights about equity trading via mutual funds. 

On the whole, looking at the long term trends, the preference of mutual funds as a popular investment choice becomes evident. The total assets managed by the Indian mutual fund industry has increased from Rs. 25.81 lakh crore in June 2019 to Rs. 26.07 lakh crore in June 2020, witnessing a 1% increase in assets over June 2019. The domestic mutual fund industry’s assets under management increased from Rs 13.17 lakh crore as on July 31, 2015, marking a more than 2 fold increase in a period of last 5 years.

While this does reflect the attractiveness of mutual funds as a wise investing decision, the very recent momentum in global and local financial markets also indicate that equities as an asset class will continue to be a superior one when it comes to delivering good long term returns. The world equities fell sharply in the first quarter of 2020 with the Covid-19 pandemic threatening to hurt the world economy in a grave manner. The local equity indices also tanked with the Nifty 50 indices falling to near four year low. 

However, there has been a very swift recovery from these levels as global central banks pushed in plenty of monetary stimulus to protect financial markets. Fiscal measures were also imparted liberally, ensuring that the global economy does not enter into a full blown depression. India also followed suit with a 20 lakh crore economic package and the RBI cut its interest rates to near 15 year lows to prop up the economy. This has certainly turned the tide in equities and the Nifty 50 has come near five and half month top with the green shoots of recovery also visible in various economic data. 

Conclusion 

The recent rebound in local equities is a sign of comfort for equity market investors. With the stocks already having come off a very rough patch, corrections from hereon will provide good opportunity for investors to increase their equity holdings. Equity mutual funds will be a clear beneficiary of this trend. Remember that individual investors primarily hold equity-oriented schemes while institutions hold liquid and debt oriented schemes. AMFI data showed that around 68% of individual investor assets are held in equity oriented schemes. The shift to equities is also a part of the long term narrative of domestic financial savings in India following ease of investing offered by stock brokers in India and falling domestic interest rates. The net household financial savings rose from 7.2% of GDP in FY 2018-19 to 7.7% in FY 2019-20. 

Also Read: Start investing in Mutual Funds with your first salary job

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