“You should stay invested for the long term” is the most common statement you hear as an investor.
But I doubt anyone really understands what is long term actually, specially with regards to equity investments.
Is it 1 year? When the long term capital gains tax becomes zero.
Is it 3 years? Because your tax saving mutual fund locks you in for this period.
Or is it 5 years? Which is the minimum premium paying term for most ULIPs and they can be surrendered without any cost.
There is no clear answer yet. It appears that actually no one has any idea about long term and long term investing.
Over the last few weeks, two charts caught my attention.
One published by Association of Mutual Funds in India, the Mutual Fund industry lobby group, as a part of its monthly update on the industry. This is what it says.
As you notice, only 37% of the investments stay for more than 2 years. In other words,
73% 63% of equity investments are sold before completing 2 years.
In a market where most investors still enter with the thought of ‘day trading’ in stocks, this looks like a substantially positive indicator.
But when you see it in comparative context it tells a different story. In 2015, a similar report based on data by AMFI stated that equity investments that stayed for over 2 years was 50%.
This means as investors we don’t care about long term. Basically, more investors are saying good bye to long term investing.
The other is from a news piece from LiveMint, the business newspaper, about persistency ratios of Top 4 life insurance companies. Persistency means the policy is still active and the buyer is paying a premium.
This is how the persistency ratio sizes up.
In this case, we are referring to the investment based insurance products such as endowment, money back and ULIPs.
Typically an insurance policy is taken for 15 to 20 year period.
As you can see post the 3rd year, not many people are interested in staying with the investment, which they bought for the long term. Post the 5th year, the number worsens. In Financial Year 2016, only 36% stayed put with their insurance investments.
So much for long term investing.
Long term investing! Really?
With insurance it is pretty clear that the sales is messy with banks working overtime to complete targets of transferring money from investor’s pocket to the insurance company and their own via the “premium” trick.
As policy holders realise the issue and the trick played out on them, they are quick to head to the exit.
As an investor the only thing you can do to save yourself is to ignore your banker’s investment advice.
What is the mutual fund investor doing? He looks at star ratings and rankings to first make an investment and then dumping it for another. The rating is an easy, understandable and no nonsense indicator. Plus it focuses on the most important thing for the investor – returns. Nothing else matters.
The investor sells the fund which is not performing currently (hence low rating or ranking) to buy a mutual fund which is performing (hence high star rating or ranking).
To which the investor says, “See, this became a 4 star fund and then a 3 star fund but I waited for 3 quarters. I waited for 1 year before making the change. Am I not patient?”
I have no answer. All that I can say is “Good luck!”