Investing is a lot about consumer behaviour and this becomes more relevant whenever there is a surge in the stock market or it goes through a consolidation phase. The stock market hitting a new all-time high recently, and hovering around it now, has rekindled the interest of investors. A new level of enthusiasm is seen among many investors. I am sure many of us would have noticed the number of people discussing the stock market while travelling on public transport, dining in restaurants or even during morning walks. Over the years, these discussions keep happening whenever the stock market rises.
Many investors started their investment journey directly in stocks or through mutual funds after March 2020. The surge in the number of folios was an encouraging sign as many investors, irrespective of their age, saw the potential of growing and creating wealth through equities. Some were guided by professionals, some by friends or relatives or colleagues, and some by the ‘university of social media’, while others did it on their own.
There is no doubt that the sentiments of existing and new investors will be higher when the markets are on a roll. They not only see their portfolio value increasing, but the returns from their watchlist also keep prompting them to invest. During the Covid phase, two more factors came into play: people had ample time due to the lockdown and money was flowing freely into the market. Many investors during those days invested through different websites and apps mainly by just looking at the top-performing funds.
The criteria to invest in funds was based on a simple sorting exercise—sort by returns or latest performance. The result of these sorts was mainly International, Pharma & IT funds because these were the fund categories generating high returns during those days. At the same time, equity-diversified funds looked very boring and were nowhere among the best results. The growth of the funds from April to December 2020 shows this part quite clearly. Here comes the behavioural aspect, where what is doing well in recent times is the best option and many people invested in them thinking these will perform well in the future too.
A quick disclaimer: the funds referred to are just examples for the fund category. It is not to highlight any particular mutual fund scheme or sector. This article is not about sectoral or diversified funds, but about our behaviour as investors.
Today, when we look at these investments, there is a mixed bag. The recent run-up of the stock markets has certainly helped some of the funds to recover. In fact, some of them are quite close from a CAGR perspective, then why discuss this?
Many of you would have come across worried investors during the last couple of years, particularly those who invested during the market surge of April to December 2020. Some were losing faith in their investments and some planned to exit looking at the slow progress a couple of quarters ago. This is quite clear if you look at how International, IT & Pharma funds have performed from October 2021 to March 2023 in the chart. While all funds have generated positive returns, the kind of volatility some funds went through certainly made their investors more shaky. This is another aspect of investors’ behaviour which can play a significant role in their future investment decisions.
Now that stock market discussions are again gaining traction and investors will plan to invest, their behaviour in deciding the right funds is important and hence the need to get the sorting right this time.
There is nothing wrong with looking at past performance. It does give insights into the way the funds are managed, consistency in their returns and how they have performed compared to their peers or benchmark. Hence, long-term performance across market cycles is an important parameter but this cannot be the only one.
The mutual funds we invest in are more like the vehicle to reach the destination and they are not the destination itself. Hence, you need to first plan for destination (goals), how much time you need to travel to reach that destination (time horizon) and how fast or slow you should travel (asset class or category), before deciding on which vehicle should be used.
Random investments generate random returns and may not always work. Random investments are mostly due to our behaviour towards investing. There is a role for each category of mutual fund scheme, be it diversified or sectoral or thematic, when you look at it from a broader perspective. All this will work well when the sorting is first done on goals, time horizon and risk involved, and then selecting the vehicle, implying that mutual fund schemes will be better, easy and result-oriented.
Harshad Chetanwala is co-founder at MyWealthGrowth.com
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Updated: 23 Aug 2023, 10:51 PM IST
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