Investments are not behaving the way we expect them to, but investors shouldn't abandon the basics
24-Oct-2011 •Dhirendra Kumar
Departures from the normal are sometimes hard to recognise, but for Indian mutual fund investors, they have become so widespread that they are now hard to ignore. At this point of time, here's the situation in the major asset classes. Equity hasn't really hasn't done anything in more than three years. In debt funds, there is an almost complete convergence of returns between maturities of widely different time horizons, and the only type of fund that has got investors excited for a long time are gold funds. Even within equity funds, mid-cap funds have performed better in a market decline than have large-cap funds.
None of these things are supposed to happen. Take the simplest case, that of equity investments. It's a cornerstone of investment planning that over longer periods of time, the risk of equity is minimal and likelihood of high returns is high. More than that, it's supposed to be more or less cast in stone that when the equity markets are skittish, mid-caps and small-caps do worse than large-caps. Large-caps are more liquid, investors have less confidence in the basic quality and stability of earnings in mid-caps.
When you step back and take a high-level view like this, then you could be forgiven for thinking that something is seriously wrong with what we thought was the normal. Perhaps something has changed fundamentally. Perhaps, as an investor, you now need to abandon what you thought were the basics of investing and look for a new set. As, the Americans would say, not.
Everyone of these odd things is a departure from the mean and you should expect a strong reversion to the mean at some point. Three years of dilly-dallying have left the equities much better-priced than they were. And, large-caps have done poorly because they are preferentially owned by FIIs. Therefore, when the FIIs are selling en masse they end up being preferentially sold. With fixed income, it won't be long before the basic rules reassert themselves and the risk-return continuum falls into place. The current combination of strange happenings is little more than a curiosity that will fade away.