What is More Beneficial - Higher Rate of Return or Higher Wealth

While Investing, many investors look for the “Right Time” to start and stop investments to earn a higher rate of return. In investment, there is a saying that “The Right Time to Invest is Now”, which fits well to the investor who is in the process of creating wealth or achieving his financial goals.

When market looks high, investors often think that they should

• 1. Stop their ongoing investments or
• 2. Withdraw the invested money or
• 3. Postpone the planned investment

The reason the investor wants to act like this is to ‘LOCK’ or ‘PRESERVE’ the high rate of return on his investments.

However, just think

• Is it possible to know whether the market is at its peak or it can further go higher?
• Is it possible to know as to when the market will fall, for what duration it will fall and how much it will fall?
• Can your financial goals be delayed to get a higher rate of return?
• While waiting for the market to fall, will you be able to keep your money aside so as to invest it later?

“No” is the practical answer in most of the cases, but even if your answer is “Yes”, let’s take a look at the illustrations given below.

Illustration 1 – The Small Cap market was quite expensive in the period “April 2018 – Mar 2019”, and again became expensive after December 2020. Wealth created by two persons with different approach is as follows:

Mr. B, instead of making higher rate of return, was able to make lesser wealth than Mr. A, who had been investing continuously.

Observation from the above example –

• Higher rate of return does not mean higher final value of investments.
• Mr. B cannot buy something of Rs. 50,000 with 37% of return, but Mr. A can buy it with 26% of return. More money buys you more and not higher rate of return.
• Mr. B was able to invest lesser money than Mr. A due to delayed and postponement of investments.
• In long term, the performance of the funds is not perfectly co-related with the index. During the period of April 2018 – March 2021, Small Cap Index gained 18% in absolute terms, while NAV of SBI Small Cap fund moved up by 38%.
  
  By only looking at market index, an investor loses out on the extra returns generated by a well-managed and performing mutual fund scheme.

Illustration 2 – Similarly, the example below demonstrates the experience of the investor who waits for the market to fall.

Mr. B, who waited for the market to fall and invested more amount, despite getting higher rate of return was able to make lesser wealth than Mr. A, who had been investing continuously.

Conclusion:

• There is always a “Right Time” to invest. Instead of keeping an eye on the market, one should focus on his goals and invest accordingly.
• Getting higher CAGR may make your portfolio look fancy, but it is the wealth which is the right appreciation of your investments.
• There is uncertainty about the time for which a market remains expensive or cheaper. So, by waiting for peak and low, one will miss lots of opportunities which are always there in the market.
• As it is said that “Discipline is the Bridge between Goals and Accomplishment”, maintaining discipline of continuous investment is very important for wealth creation.
• A well-managed fund has the ability to generate better returns than the market index. As market moves in up and down cycles over a period, such fund takes advantage of this market movement and along with discipline of continuous investing, creates huge wealth for investors.

So, if you are investing for wealth creation, invest in a portfolio of well managed funds and do not worry much about the markets. Investing in lower markets and exiting from higher markets may enhance your portfolio’s rate of return, but objective of wealth creation would be defeated.

Happy Investing!

CA Taneesha Bansal
Research Analyst, Investguru