When a hare and a tortoise invest in MFs
A hare and a tortoise decide to build a corpus of Rs 1,000 by investing Rs 100 every year over a period of 5 years. Who do you think will win this time?
By Saurin Parikh | Apr 23, 2016
Once upon a time, there was a hare and there was a tortoise. While both of them were equity mutual fund investors, their different personalities meant that they were poles apart when it came to investing. The hare was boastful, the tortoise was humble. The hare left no opportunity go by to show off his exploits, especially when it came to the money he made from his investments. The tortoise, on the other hand, preferred to keep his investment successes to himself, even though the returns he earned were in line with what the hare earned.
But one day, the tortoise had had enough of the hare's boastful manners. That was the day when the hare had loudly proclaimed, 'I'm the greatest investor in the world.' To which, the tortoise said, 'Stop being such a loud-mouthed fool, you'll fall flat on your face one day.' The hare, though, was in no mood to listen to reason. 'I'll prove it to you, and to everyone else. I can show you that there's no investor as great as I am.' The tortoise, determined to make the hare eat his words, challenged him to an investment competition.
The competition was thus - they decided to build a corpus of R1,000 by investing R100 every year over a period of 5 years. At the end of 5 years, the winner would be the one whose investment value would be the most above the target of R1,000 or least below R1,000.
Once the competition began, both the hare and the tortoise selected mutual funds that they thought would help them achieve the target. The hare, typical to his personality, was confident that he would come out on top. He chose the funds that were doing the best during those days. The tortoise was a bit more meticulous with his selection. He did pick well-performing funds, but he also wanted to make sure they were the right kind of funds for a period of 5 years.
Their initial investments made, and the ones for the coming years scheduled, the hare and the tortoise got on with their other businesses. Over the next 5 years, the hare, confident in his abilities to have picked the finest funds, didn't bother to check if his investments were doing well enough or not. One might say, he slept over his investments. The tortoise, though, kept a close watch. Once or twice, he even made some changes - redeeming a certain fund and investing in another.
Needless to say, when the 5 years ended, the hare was in for a rude shock. A couple of the funds he had invested in had been doing poorly for 2-3 years. Their underperformance affected the returns of his entire portfolio and the hare ended up with only R837. In comparison, the tortoise ended with R1,109, because he had monitored the performance of his funds and had gotten rid of the laggards.
The tortoise won because he didn't sleep over his investments, he made periodic checks and replaced the funds that were consistently underperforming. And that, my friends, is the moral of this story.