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Spending time in stock market is must for wealth creation: Chandresh K Nigam, Axis Mutual Fund

Investors make the mistake of projecting recent market performance onto the future and follow the market.

, ET Bureau|
Updated: May 13, 2019, 12.37 PM IST
ET Online
"One approach that can help with the discipline is to limit how often the portfolio is reviewed to maybe once a year."
Investors should not second-guess the market based on day-to-day noise, says Chandresh Kumar Nigam, MD and CEO, Axis Mutual Fund

What is your assessment of the high gap between investor and mutual fund return?
The difference is caused by sharp fluctuations in investor flows into equity funds over time. Just as equity markets are cyclical, so are investor flows. They are driven by sentiment and commonly known as the greed and fear cycle.

Investor flows dry up when market goes through a 1-2 years sell-off or poor returns phase (fear) and pick up strongly once the market cycle turns and the market delivers good returns (greed).

Thus investors make the mistake of projecting recent equity market performance onto the future and follow the market. This cycle is highly damaging to investor returns and is contrary to the maxim ‘buy low sell high’.

How can investors plug this gap?
We are emotional human beings. It is not easy for individual investors, big or small, to switch off their behavioural impulses while investing, even if these cause them harm. Instead, it is often easier to set up some easy rules that can work on auto pilot and limit day-to-day discretion.

For example, setting up a long-term SIP takes away the power of making decisions and thus prevents timing the market via lump sum investments. Also, it helps if investors are clear about their objectives before they make investments.

In case an investment is being made to cater to the education needs of one’s child 10 years from now, the approach will be different compared to trading on the market opportunistically.

Is it as simple as spending more time in the market? Can investors do better by timing the market?
Spending time in the market allows the benefit of long-term compounding to play out. This is essential for wealth creation. The most crucial challenge for investors is to let their investments run.

They should not second-guess the market based on day-to-day noise. One approach that can help with the discipline is to limit how often the portfolio is reviewed to maybe once a year.

What should be investors’ approach in current uncertain market environment?
Markets are always uncertain in the short term. The answer lies in not worrying needlessly about this and rather taking proactive steps that the investment plan does not get affected by any potential volatility – such as having a clear objective, making regular investments and not reviewing the portfolio too frequently.

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