How equity funds leverage a few good months for outperformance
Financial experts have for long touted the benefits of long-term investing, especially where it concerns equity mutual funds. Yet, a large number of retail investors continue to exit the markets after a short duration. According to data from Association of Mutual Funds in India (Amfi), 51.4%, or more than half, of the investments held by retail investors have an average holding period of just more than two years.
The exits are mostly attributed to market volatility. For instance, India’s stock markets have had to navigate choppy waters in October amid increasing global geopolitical tensions, such as the Israel-Hamas war, and economic turbulence caused by rising inflation and a steady rise in US bond yields. The resultant market volatility pulled down the S&P BSE Sensex by 3%.
The BSE 150 Mid Cap Index fell 3.3% and BSE 250 Small Cap Index declined about 2.7%. Such volatility is a deterrent for many retail investors who are vary of negative returns. Equity investments are inherently volatile.
But over longer periods, this volatility tends to even out. Just a few months of sharp outperformance by equity funds can deliver outsized returns for the investor. But if an investor exits early, he or she ends up missing out on these very months.
A recent study by Morningstar India, an investment research firm, has captured the number of best-outperforming months across actively-managed funds in the last 10 years. It has termed these months as critical months—without the outperformance in these months, the fund would either perform in-line or underperform the benchmark. In yjr last 10 years, just five months—or 4.2% of 120 months—accounted for outperformance of all actively-managed equity funds The study found that half of all
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