The boring path to exciting returns

Looking to get good returns from your investments without working too hard for them?

Let me start with a question: why does anyone invest? You may say, to get good returns on the capital. Well, of course. So, how should one invest to get good returns?

This question may attract a lot of varied responses: invest in stocks, trade derivatives, invest in the top-performing asset class at the moment, and so on and so forth. What if I told you that getting good returns has nothing to do with any of these?

If you have started to roll your eyes in disbelief, this quote from Late Paul Samuleson, a Nobel Prize laureate and an American economist, may be an eye-opener: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

This witty statement sums up well all there is to investing. Why is it that then most investors fail to get good returns from their investments? From my experience of the last 15 years, I can say that people tend to overcomplicate investments. They are always on the lookout for exciting investments that can help them make a quick buck. More often than not, this approach only results in wealth destruction.

How? When you try to make a quick buck, you pay a lot of attention to what’s hot and sizzling at the moment. This invariably means flipping your investments every now and then to chase the ongoing trend. But just like fashion, trends keep changing faster than you can keep pace with them and you never settle with your investments.

Because of this, limited compounding takes place and the outcome is poor returns. No wonder that many investors don’t even get Nifty 50-like returns from their investments.

A study by Axis Mutual Fund done for the 20-year period as of March 2022 found that while actively managed equity funds delivered 19% per annum, the average investor made less than 14%. This loss in return was due to the frequent buying and selling investors tend to indulge in. This is unfortunate, especially at a time when SIPs are becoming popular in the country.

The SIP contribution has gone up from Rs 92,693 crore in FY19 to Rs 1,55,972 crore in FY23 (source: AMFI). It’s time that investors also reaped rewards for the faith they are showing in equity funds and SIPs.

Interestingly, I have observed that ELSS investors tend to make good returns as compared to those investing in open-end funds. And that’s not because ELSS funds perform better than open-end funds. The reason is the lock-in period of ELSS funds.

Because the capital gets locked in for three years post investment, people can’t do anything about it. This simply results in better returns. The French philosopher Blaise Pascal put it well when he said, “All of humanity's problems stem from man's inability to sit quietly in a room alone.” Indeed, a Sebi report on futures and options trading found that as many as 90% of traders lose in this segment. Surely, overactivity is no panacea for good investment outcomes.

What should you do then?

Consider this. A simple SIP in the Nifty 50 Index over the last 20 years would have delivered about 13% per annum returns.

At this rate, you would have accumulated about Rs 1 crore with SIPs of just Rs 10,000 per month. That’s the magic of compounding, discipline and not tinkering with your investments needlessly. So, all you need to do is pick a good fund and stay invested.

What’s a good fund? That’s the tricky part as the toppers and laggards would keep changing. That’s why, for most long-term, hands-off investors, plain index funds could be the right choice. I have also been a fan of asset-allocation funds.

Of course, before you start investing, you should build an emergency corpus equivalent to about 6 to 12 months of your expenses. You should also have adequate life and health insurance.

More importantly, don’t try to seek excitement from your investments. There are other avenues, such as travel and sports, to take care of that. As far as investments are concerned, after you have made them properly, they will work best when they are left alone.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)