It is natural for anyone to hope that his/her investments would appreciate nicely, however, wild market gyrations have baffled even the most seasoned of investors. In the week gone by, stocks were on a free fall. While the Sensex fell by -6.37%, the Nifty was down 6%. Technology stocks were the worst hit, losing 9% on the BSE IT Index. As for mutual funds, they did fare marginally better while closely tailing the indices. Equity diversified category was down 5.6%; tech funds lost 8.5%.
Despite the bloodshed, some AMCs launched new products. First India AMC launched its maiden open-end diversified equity fund: First India Growth Fund. It opened for initial subscription on July 22, and will be in circulation till August 12, 2002, with a minimum investment of Rs 3,000 and no load charged during this period. On an on-going basis, the fund will carry an entry load of 2%. This scheme offers two plans to investors -- growth and dividend.
Already, the AMC manages four funds – three open-end bond funds and a closed-end tax-planning fund. Its small equity fund – launched in March 1997 -- has turned in a handsome return of 27.64% annualised and has been the best performing fund over the past five years.
While First India launched a maiden diversified equity fund, Alliance AMC got Sebi's clearance to launch Alliance Frontline Equity Fund (AFEF), the more diversified cousin of Alliance Equity Fund. To maintain diversity, the fund will target sector weight of its benchmark index, BSE 200, but the stock selection will be from a wider investment universe. The portfolio will be realigned to BSE 200's -- this broad-based index comprises companies from emerging industries, covering 21 sectors -- sector weightage every month.
Notwithstanding the baffling wild market gyrations, the case for equity has gained strength. The reason: a big drop in fixed income yield, symptoms of economic recovery and reasonable stock valuations. Despite these strong indicators, the market dynamics remain unfavourable as investors stay on the sidelines hurt by the freely falling market for over two years now.
The case for long-term investment in equities is strong today, though some caution could serve you well. By its design, equity is a volatile asset class and a longer investment horizon reduces your risk substantially. For instance, the 22-year history of the Sensex shows that annual returns on the index for a 1-year holding period has moved in a wild range between –52% and +265%. But for a 5-year holding period, the average annual returns range is far superior: –5% and +55%. But it remains a very risky asset for a short-term investor.
And diversified equity funds could be the right way to participate. These funds build a portfolio of stocks, chosen from various sectors, reducing risks associated with a particular industry. In the long run, a diversified portfolio helps you post steady returns and comprehensively beat the returns raked in by all other asset classes such as bonds, gold, etc. Though that diversification doesn't guarantee positive returns every year, it only reduces risk on your investments. The rules of sound investing are diversification, balance, and a long-term orientation.
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