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Sitting out the best days can cost you dear

Missing just 10 days in 20 years can cut your returns by half or even more. Take a look

Sitting out the best days can cost you dear

With stock markets at all-time highs, many investors are busy second-guessing index movements. They fear markets may drop anytime and are wondering if they should 'book profits' and sit out any coming crash.

But unfortunately a market top is extremely hard to call. There is no science behind pre-empting daily movements. So what happens if you exit the markets in an attempt to pre-empt a fall and miss out on some good days? Well, the stock market delivers its rewards in big spurts. Therefore, missing the best days comes with a hefty price tag. A Value Research analysis shows how missing just 10 best days over a long 20-year tenure would have impacted your returns.

The power of 10
A time period of ten days is a little more than a week. Long-term investors may think 10 days don't mean much, but in reality they do. There are 250 trading days in a year and 20 years would feature 5000 odd trading days. So, ten days statistically represent 0.2% of the time.

Our analysis shows that missing the 10 best days can drill a big hole in your eventual returns.
We looked at daily returns of 3 funds--one each belonging to large-cap, multi-cap and mid-cap category--over 20 years (June 2, 1997 to June 2, 2017). Each fund moves in a different manner. Hence, the 10 best days would be mostly different.

In the large-cap space, we studied HDFC Top 200 Fund. This fund is among the biggest in its segment and has the longest track record among similar-sized schemes. If an investor had put Rs 10,000 in HDFC Top 200 Fund way back in June 1997, over the next 20 years the original investment would have grown to Rs 3.77 lakh, i.e., a 38-fold gain. These returns are impressive and quite attractive for a long-term investor who stayed invested through thick and thin. This is assuming she never withdrew the money despite many highs and lows.

HDFC Top 200 Fund

10 best days Gain(%)
19/05/2009 15.27
01/03/1999 9.09
18/05/2004 7.34
07/04/2000 6.66
03/01/2000 6.42
16/04/1999 6.4
17/06/1998 6.29
13/10/2008 6
19/05/2004 5.86
23/07/2008 5.82

But what if she missed the 10 best days (when gains were the highest) in these 20 long years? Well, quite interestingly, the original Rs 10,000 investment would have dropped to Rs 1.83 lakh. Consequently, the final corpus would have nearly halved. If she had missed more good days, the cumulative return figure would have fallen even further.

In the mid-cap space, Reliance Growth Fund is among the biggest and popular funds with a 20-year plus track record. If you stayed invested in these 20 years, an initial investment of Rs 10,000 would have grown to Rs 9.23 lakh. The rapid pace of wealth creation in midcap stocks is the reason why the fund has managed to give such stellar returns. If you missed the 10 best days in Reliance Growth Fund, your returns would have been a meagre Rs 3.84 lakh. This means your eventual corpus would have plummeted by 58% for missing just 10 days.

Reliance Growth Fund

10 best days Gain(%)
15/07/1999 15.21
19/05/2009 14.36
04/03/1999 10.4
03/01/2000 8.57
01/03/1999 8.5
18/05/1999 8.03
02/09/1999 7.74
14/03/2001 6.77
09/06/2006 6.68
24/05/2002 5.94

Lastly, we looked at Franklin India Prima Plus Fund in the multi-cap space. This giant fund is a proven wealth creator in industry. Staying invested through both good and bad times over the course of 20 years would have fetched scintillating returns. An investment of Rs 10,000 way back in June 1997 would have grown to Rs 7.8 lakh in June 2017. That's a growth factor of 78 times. But if you had timed the market and missed the 10 best days of Franklin India Prima Plus Fund, you would have gotten just Rs 3.77 lakh - a loss of 51%.

You must remember that all of the above numbers relate to missing just the ten best days. That is, after exiting the fund just before a great day, the calculations assume that investors re-entered the fund the very next day. But in practise investors who jump out at a market peak seldom have the stomach to get back in while it is still rising. Waiting for a fall can lead to extended periods of staying out of the market. That would be even worse for returns!

Franklin India Prima Plus Fund

10 best days Gain(%)
19/05/2009 14.94
01/03/1999 11.05
15/06/2006 7.32
07/04/2000 7.27
03/01/2000 6.85
18/05/2004 6.13
25/03/2008 5.65
17/06/1998 5.6
14/03/2001 5.6
13/10/2008 5.46
13/10/2008 5.46

These are the stories of just three funds, but it can be safely assumed that missing the ten best days would result in similar results across the equity fund category.

P.S. The moral of the story is simple - remain invested for the long term.