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How to make wealth, over the long term
December 08, 2004 11:04 IST
Should you be investing in equity funds at these levels? The BSE Sensex is at record highs and there seems to be no sign of the much-spoken correction.
Investors who have been waiting for the correction are wondering when it will come, if at all, and what they should be doing with their money till that happens.
We believe that investors can consider investing in equity funds at current levels, but the investments should be staggered, through the systematic investment plan, for instance.
However, investors should be prepared to remain invested over the long-term (at least 3 years) as the chances of clocking significant growth appear bright only over that long a time frame. In other words, if you enter at these levels and find only moderate growth over the next 12 months, don't blame your fund manager or your mutual fund advisor.
The problem could be in your abbreviated time frame of 12 months and not their judgement.
The problem is, much as investors, at least the intelligent ones, would like to invest over 3-5 years, there aren't too many equity funds that are managed that way.
In other words, there aren't too many equity funds where the fund manager has the luxury to make investments that will fructify over 3-5 years.
Constant redemption pressure and the investor's obsession with short-term NAV appreciation forces the fund manager's hand and he is compelled to look for short-term growth thereby compromising the long-term perspective.
This could change if investors had access to an equity fund where the fund manager is not constrained by daily redemption pressure and can select stocks with a time-frame of at least 3 years, that would set the tone for mutual fund investing -- the right way.
This brings us to another grouse that investors have; that fund houses only preach long-term investing over 3-5 years, they don't have mutual fund products to cater to the long-term investor.
While admittedly at present, its not like that there is a barrage of 'long-term' equity funds at the investor's disposal (some fund houses are likely to walk the talk and introduce long-term investment options shortly), there are a few options and investors should make the most of it.
One category that beckons the long-term investor is tax-saving equity funds. Tax-saving funds have a 3-year lock-in and offer benefits under Section 88 (tax rebate).
That is not to say only investors with a tax-planning objective should go for tax-saving funds. As explained above, its the 3-year lock-in that should be of interest to the long-term interest which will allow the fund manager to aim for long-term capital appreciation.
So even if you are not looking for tax-savings or have already exhausted the Rs 10,000 Section 88 benefit, consider investing a portion of your assets in tax-saving funds to accumulate wealth over the long-term.