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Ignore Equity Mutual Funds at Your Own Peril

Author: Balaji Rao/Thursday, August 3, 2017/Categories: Cover Feature, Invest, Expert View

Ignore Equity Mutual Funds at Your Own Peril

It is in search of profits that any investment opportunity is sought. Investing in fixed-income instruments such as bank and post office products, precious metals such as gold or real estate are common and most-sought-after opportunities. While fixed-income instruments have a definite maturity period and offer predictable returns, precious metal and real estate have no such maturities or returns; investments in these assets may run into several years and returns may be skewed. Nor do investors invest in these assets with a date in mind or an expectation of any fixed returns! The belief in gold and real estate is very strong and is built through generations of calibrated ideologies that are passed on from parents to their children and the story continues.

Going by the historical time horizon for staying invested in real estate, the range would be anywhere between 15 and 30 years. Besides self-occupation, people invest in vacant plots, readymade houses and apartments with an expectation that it offers them superior returns over an unknown period of time. In fact, the returns they would make are purely speculative and notional by nature. 

How much does an investment of Rs 10 lakh real estate 15-25 years ago (in a prime location in the country) fetch currently?? Would it be Rs 2 crore at 20 times? Or Rs 3 crore, or Rs.5 crore? Are we sure that no other asset class would have generated such returns over the same time horizon?

Hold your breath, for you have forgotten that equity mutual funds can do more (see table below):

 

SCHEME NAME

LAUNCH DATE

No. OF YEARS

CAGR

INVT. AMOUNT

LATEST VALUATIONS

No. OF TIMES GROWTH

FRANKLIN INDIA PRIMA FUND

Dec-93

23.7 years

20.57%

10 lakh

Rs 8.80 crore

88 times

FRANKLIN INDIA BLUECHIP FUND

Dec-93

23.7 years

16.90%

10 lakh

Rs 4.20 crore

42 times

HDFC PRUDENCE FUND

Feb-94

23.5 years

17.62%

10 lakh

Rs 4.70 crore

47 times

FRANKLIN INDIA PRIMA PLUS FUND

Sep-94

22.9 years

18.70%

10 lakh

Rs 5.30 crore

53 times

HDFC EQUITY FUND

Jan-95

22.6 years

19.36%

10 lakh

Rs 5.70 crore

57 times

BIRLA SL BALANCED FUND

Feb-95

22.5 years

20.55%

10 lakh

Rs 7.00 crore

70 times

RELIANCE GROWTH FUND

Oct-95

21.8 years

23.28%

10 lakh

Rs 10.19 crore

100 times

RELIANCE VISION FUND

Oct-95

21.8 years

19.65%

10 lakh

Rs 5.20 crore

52 times

HDFC TAX SAVER FUND

Mar-96

21.3 years

19.63%

10 lakh

Rs 4.80 crore

48 times

HDFC TOP 200 FUND

Sep-96

20.9 years

19.27%

10 lakh

Rs 4.10 crore

41 times

ICICI PRU TOP 100 FUND

Jul-98

19 years

19.21%

10 lakh

Rs 3.00 crore

30 times

BIRLA SL EQUITY FUND

Aug-98

18.10 years

24.31%

10 lakh

Rs 6.50 crore

65 times

FRANKLIN INDIA TAX SHEILD

Apr-99

18.3 years

23.60%

10 lakh

Rs 5.00 crore

50 times

HDFC LONG TERM ADVANTAGE FUND

Jan-01

16.6 years

22.45%

10 lakh

Rs 3.00 crore

30 times

SUNDARAM SELECT MID CAP FUND

Jul-02

15 years

28.67%

10 lakh

Rs 4.60 crore

46 times

BIRLA SL FRONTLINE EQUITY FUND

Aug-02

15 years

21.91%

10 lakh

Rs 2.00 crore

20 times

BIRLA SL MIDCAP FUND

Oct-02

14.9 years

25.17%

10 lakh

Rs 2.90 crore

29 times

 

The above examples show real time returns that different types (themes) of equity mutual funds have generated over 15-23 years (verifiable data is available only since 1993). The returns are astonishing and easily comparable to any other asset classes; maybe even unbelievable for many. And let’s also remember that the returns from real estate for the same tenures would have been taxable at a minimum 20% while the returns from equity mutual funds would have been completely tax-free.

These are only a few examples in the table above and there are several others as well that have proved that equity mutual funds are opportunities that cannot be ignored and it is time every investor took notice of the power of equity and power of compounding.

Wealth creation cannot happen with a prejudiced approach towards asset classes, each asset has to be viewed and understood judiciously. People struggle to create wealth that require high initial investments, that are illiquid and also non-tax friendly assets. Many individuals even borrow to make large investments, which can be neither invested in small amounts nor can be liquidated in small quantities.

Lastly, investing in equities is not a rocket science to perceive that is complicated, nor is it a Jurassic Park to be scared of; it is the wrong perceptions and prejudice that has killed its importance and potential.

Staring early at the age of 25-30 years, the prime earning years, is important to achieve higher returns with small investment commitments that can assist in wealth creation which many equity mutual funds have done diligently who believed in this investment opportunity.

In today’s era with so much of information available and innovation in products and portfolio management it would not be ignorance that would lead to poor wealth creation, but foolishness surely would. Like the CEO of Facebook Mark Zuckerberg famously said, “the biggest risk is not taking risk, in a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

Ignoring equity would really then be a risky proposition!

(The author has written six books on investing and personal finance. He has 23 years of industry experience and six years in academics.)

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Balaji Rao
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