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A beginner’s guide to mutual funds - 8

SIP versus one-time returns
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SIP versus one-time returns

Most of the ups and downs in key benchmark indices are point-to-point returns. That means the data doesn’t capture your periodic investments through SIPs. For example, one-year return might be positive because it is looking at the movement of the index from one year ago. However, your SIP returns might be negative during the same period because you have been investing every month. The opposite scenario also could be true.

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Get the large picture
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Get the large picture

Many investors are worried about the short-term underperformance of their equity mutual fund schemes. It mostly reveals their lack of understanding about the nature of equity mutual funds. You might have heard or seen that equity mutual funds can be extremely volatile and risky in the short period. This is exactly what you are witnessing when your scheme is offering you negative returns in three months or six months or a year. Negative returns means losing money - that is the risk you take when you are investing in equity mutual funds.

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All is lost?
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All is lost?

No, definitely not. This is time for you to remember the second part of the statement regarding the risk and volatility associated with equity mutual funds. The second part is: equity has the potential to offer superior returns than other asset classes over a long period. This is backed by data and countless studies. So, take your eyes off the short-term losses and remind yourself that you are investing in equity mutual funds to achieve your long-term financial goals.

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Always compare
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Always compare

Whenever you are worried about the performance of your scheme, you should always try to find out what is the performance of SIP investments in the scheme. Even before that you should try to find out the performance of the benchmark index of the scheme. This will tell you how the universe of stocks that the scheme can invest has performed. Next, look at the performance of the category of the scheme. The category average will tell you the average returns offered by the category. If your scheme has matched or outdid the category average, you are in the right scheme.

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What if the scheme is underperforming?
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What if the scheme is underperforming?

A short-term underperformance of three months or six months do not warrant any actions from you. Only if the scheme is underperforming for a year or two, you should be worried. Even then avoid panic or knee-jerk reactions. Always try to find out the reasons behind its lacklustre performance before taking any decision. No scheme remain number one forever. If your scheme is in the first or second quartile, you should be happy. Only if it is in the bottom heap for a year or two, you should sell it. That too if you find the reasons offered by the fund manager unconvincing.

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Invest immediately
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Invest immediately

Once you sell your investments, do not wait for a long period to invest it again. A lot of time often leads to adventures like trying to time the market, try to make some quick bucks, etc. You should always invest the proceeds immediately in a better performing scheme in the same category. Provided, you goals, time horizon, and risk profile allow it. Of course, if you are a few years away from your goals, you shouldn't invest the money in an equity scheme. You should park the money in a debt scheme.
Also read:
A beginner’s guide to mutual funds - 1
A beginner’s guide to mutual funds - 2
A beginner’s guide to mutual funds - 3
A beginner’s guide to mutual funds - 4
A beginner’s guide to mutual funds - 5
A beginner’s guide to mutual funds - 6
A beginner’s guide to mutual funds - 7

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