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Stop loss by not stopping

This data-driven analysis will tell you how much you stand to lose if you stop or pause your mutual fund investments during trying times

Stop loss by not stopping

Getting hurt by volatility, often mutual fund investors decide to discontinue their investments. Some begin by taking a 'pause' and eventually forget about pressing 'play' on investments. And some make the mistake of delaying investments to a future period, saying 'let me wait it out'. Unfortunately, in all these cases, investors lose gains.

In a bid to time wobbly markets, investors forget that their small mistakes can cost them big. Would it be okay if you missed a month and lost an opportunity to make 50% gains in a midcap fund? How about sitting out in a quarter where your smallcap fund more than doubled money? Who would you blame if your well-intentioned investment 'pause' lasted a year and caused a 234% opportunity loss in a multicap fund? Let us look at a few examples of some popular funds.

Large gains
With volatility in domestic markets on the rise, especially in 2018, many retail investors have been considering stopping investments. They flood experts with queries such as 'should I discontinue investing till 2019 election?' While on the face of it, political uncertainty can be harmful for markets, second-guessing what Mr. Market will do is a tough job. The reality is that nobody knows for sure what will happen.

Short-term predictions run the biggest risk of going awry. Still, long-term investors take such calls and ultimately may miss out on big gains. Let us have a look.

Largecap funds are popular for a variety of reasons. Firstly, these funds invest in tried-and-tested stocks. Secondly, they are less volatile. Thirdly, largecap firms give back a lot of cash in form of dividends, creating an extra source of income for investors. However, largecap funds are no raincoat if markets face inclement weather. Like a sturdy umbrella, largecap funds do weather the storm better than others but you are not likely to be completely dry. But when markets tumble, some investors do stop investments even in vintage largecap funds. As a result, you could miss great opportunities to make money. We looked at the best months, best quarters, and best years of popular largecap funds.

In some cases, these 'best' periods came right after periods when the funds suffered the worst of times. For instance, HDFC Equity Fund, like many others, was completely distraught in the second half of the calendar year 2008. Between September 26 and October 27, 2008, the fund lost over 31%. In the quarter ended December 2, 2008, the scheme went down by 40%. It is quite likely that some investors jumped ship. But therein is the cardinal mistake. It gained 36% from the end of April 2009 to May-end. Between March 9 and June 10 i.e. a quarter, HDFC Equity Fund rose by 95%.

Largecap funds Best month Gain % Best quarter Gain % Best year Gain %
HDFC Equity Fund Apr 28 - May 28, 2009 35.86 Mar 09 - Jun 10, 2009 95.14 Oct 20, 1998 - Oct 20, 1999 179.39
Aditya Birla Sun Life Frontline Equity Fund May 11 - Jun 10, 2009 33.57 Mar 09 - Jun 10, 2009 80.16 Mar 09, 2009 - Mar 11, 2010 117.37
Kotak Select Focus Fund May 07 - Jun 06, 2014 18.86 Feb 21 - May 23, 2014 24.64 Jan 29, 2014 - Jan 29, 2015 77.94



 

Time in the middle
Given their focus on riskier midcap and smallcap stocks, midcap and smallcap funds show greater volatility. Sometimes, the wild swings can be too much for investors. Yet, like a pendulum, the swing can happen both ways.

After a dismal performance in 2008, many of these funds came back in style in 2009. HDFC Mid-Cap Opportunities Fund gained over 31% in its best month (May 06, 2009 - Jun 05, 2009). For somebody who stopped investments at the end of 2008, they would have surely missed the fund's 142% rise between Mar 09, 2009 and Mar 11, 2010.

Midcap funds Best month Gain % Best quarter Gain % Best year Gain %
HDFC Mid-Cap Opportunities Fund May 06 - Jun 05, 2009 31.48 Mar 09 - Jun 10, 2009 71.73 Mar 09, 2009 - Mar 11, 2010 142.61
Reliance Growth Fund Dec 03 - Jan 04, 2000 50.82 Oct 05, 1999 - Jan 04, 2000 86.37 Jan 04, 1999 - Jan 04, 2000 229.36
Franklin India Prima Fund May 06 - Jun 05, 2009 41.7 Mar 06 - Jun 05, 2009 90.91 Jan 01, 1999 - Jan 03, 2000 217.85


But not every nadir and revival happened during the global financial crisis in 2008-09. Remember the dotcom bubble of late 1990s and early 2000? Ask Reliance Growth Fund which saw its NAV jump over 200% in a space of 12 months between 1999 and 2000.

Let us look at another example. With markets on a roll since December 2013, many investors may have been taken aback by the tear-away rally that was built around change in electoral politics. The equity party picked up steam around the May 2014 election. Going by the conservative approach, these investors could have stopped investments and even booked profits to avoid any post-election scare. But what followed was a pleasant surprise for investors who stay put. Smallcap stocks just exploded, pushing up smallcap funds. Reliance Smallcap Fund's best month came between May 07, 2014 and Jun 06, 2014 as the scheme went up by 26%. In the quarter ended Jul 04, 2014, the fund clocked gains of nearly 47%. Between Sep 13, 2013 and Sep 15, 2014, the smallcap fund went up by a whopping 150%.

Smallcap funds Best month Gain % Best quarter Gain % Best year Gain %
Franklin India Smaller Companies Fund May 06 - Jun 05, 2009 45.54 Mar 05 - Jun 04, 2009 99.81 Mar 09, 2009 - Mar 10, 2010 155.58
Reliance Smallcap Fund May 07 - Jun 06, 2014 26.12 Apr 04 - Jul 04, 2014 46.86 Sep 13, 2013 - Sep 15, 2014 150.05
DSP BlackRock Small Cap Fund Mar 09 - Apr 08, 2009 28.61 Mar 09 - Jun 10, 2009 105.38 Mar 12, 2009 - Mar 12, 2010 213.97


Multi-ply
Multicap funds are diversified mutual funds that can invest in companies across market capitalization. Many investors prefer to invest in such schemes because they are able to take advantage of the opportunities across market cap for the investment, and are not limited in their approach. Let us take a look at what missing on gains meant for Motilal Oswal Multicap 35 Fund (erstwhile Motilal Oswal MOSt Focused Multicap 35 Fund).

Many of us would recall the bearish days of 2015. Markets were having a bad time. For then recently-launched Motilal Oswal Multicap 35 Fund, 2015 was a tough year. The fund lost 12% in one single quarter. A few days back, it also had its worst-ever month with over 11% lost in less than five weeks. As history has taught us over and over again, it is important to stay invested especially after bearing the pain.

As markets started improving in 2016 and 2017, Motilal Oswal Multicap 35 regained its mojo. Between Dec 26, 2016 and Jan 25, 2017, the fund gained nearly 14%. Its best quarterly performance was seen around the same time, with the scheme rising by over 23%.

Multicap funds Best month Gain % Best quarter Gain % Best year Gain %
Motilal Oswal Multicap 35 Fund Dec 26 - Jan 25, 2017 13.95 Dec 26, 2016 - Mar 27, 2017 23.4 May 02, 2014 - May 04, 2015 66.68
Franklin India Prima Plus Fund Dec 03 - Jan 04, 2000 36.25 Mar 09 - Jun 10, 2009 74.29 Jan 04, 1999 - Jan 04, 2000 233.99
ICICI Prudential Dynamic Plan May 11 - Jun 10, 2009 23.77 Mar 09 - Jun 10, 2009 61.97 May 02, 2005 - May 02, 2006 129.72


In conclusion, investors trying to second-guess markets must understand the true effect of their wrong choices. Missing out on the best times is extremely harmful for wealth generation and wealth compounding.