Long-term investors should not worry about short-term outperformance or under-performance
The S&P BSE Sensex has gained around 3,500 points or 11% in the past six trading sessions. Since 23 March, the index has recovered around 31% as of 3 June 2020. Broader market index Nifty 50 has shown similar recovery and has delivered a return of around 32%.
The rally is broad-based this time with Nifty 500 delivering similar returns. Although there are worries over this sharp pullback, the rally has brought some respite to investors who saw a much sharper correction of around 50% in a month’s time during February-March.
However, there are many investors on Dalal Street who haven’t seen similar returns in their portfolio. Although it is too short a period but let’s understand the factors that could have led to the difference in your portfolio returns and the overall market returns.
Asset mix
The returns of a portfolio depend on what assets you are invested in and in what proportion. The higher the exposure to equities, higher the probability of returns being in line with the market.
“Investors who exited or trimmed their equity exposure may not benefit from the current rally,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors, a Sebi-register investment adviser.
If the cash or debt holding is higher, the returns are unlikely to be in line with the market recovery.
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Equity differential
Even the returns of your overall equity portfolio could differ from that of the market.
The entry point or period of investment matters a lot. For instance, if you entered in March when the market hit the bottom, then you would see similar returns, but if you had invested before or after that, your returns will differ.
“The returns will have an impact in terms of when the investor started and the strategy deployed—lump sum or staggered,” said Dhawan.
Different funds follow different strategies and their portfolio returns differ from their benchmarks as well as their peers accordingly.
“One of the major reasons for a fund to underperform could be that its investment style is out of favour. For instance, for some time now, the market has been largely driven by growth stocks, and the valuation conscious investment approach has been out of favour leading such funds to underperform their benchmarks,” said Himanshu Srivastava, senior analyst manager research, Morningstar India.
Also, if your fund belongs to a sector that hasn’t done well, it will suffer. If you invest in stocks directly, how that individual stock and the sector perform will also matter.
What you should do
Experts are cautious about the rally. “I don’t know why the market is so excited when the economic data is weak and we are seeing a sharp rise in covid-19 numbers. There is no fundamental reason for such a sharp recovery in the market. The current rally is driven by liquidity and hopes that normalcy may return as economic activities resume,” said Srinivasa Rao, chief investment officer, PGIM India Mutual Fund.
But long-term investors should not worry about short-term outperformance or underperformance. “Investors should avoid putting money in one shot,” said Dhawan.
The best strategy is to stick to your asset allocation and invest in line with your goals.
