HDFC MF Weekend Bytes

(A weekly series from HDFC Mutual Fund)

 Investors often hesitate to invest in the market,
as they are worried the market is 'too high'.

They fear they will soon face a loss and hence delay
investing. In doing so, they don’t allow the magic of
compounding to work in their favour.

Investors may not always get the perfect low entry point
for their investments. However, data shows that even if
we go wrong when it comes to the entry point of our
investments in equities, there is potential of generating
positive as well as reasonable returns.
 Let's illustrate this with a hypothetical investor, Miss Fortune, who
invests a lumpsum at the highest point of the NIFTY 50 TRI in every
calendar year from 2001 onwards. She then holds the investment for 5
years and assesses her returns. Fortunately for Miss Fortune, her
performance is reasonable despite her entry at high market levels.

CY NIFTY 50 Subsequent 5y Avg. Outperformance

CY Peak 5y CAGR 90-day of equity
level after peak FD Rate* over FD
in CY
CY01 1518.24 18.7% 5.3% 13.4%
CY02 1298.04 27.4% 5.0% 22.4%
CY03 2139.93 11.2% 4.9% 6.3%
CY04 2418.88 21.7% 5.1% 16.6%
CY05 3353.37 18.0% 5.2% 12.8%
CY06 4802.88 5.9% 5.5% 0.4%
CY07 7479.08 0.2% 5.9% -5.6%
CY08 7642.89 0.2% 6.0% -5.8%
CY09 6456.97 11.0% 6.7% 4.4%
CY10 7917.48 6.0% 6.9% -1.0%
CY11 7727.31 6.5% 7.0% -0.5%
CY12 7622.38 12.5% 6.9% 5.6%
CY13 8279.62 12.3% 6.8% 5.6%
CY14 11303.65 8.6% 6.6% 2.0%
CY15 11856.58 6.0% 6.5% -0.5%
CY16 12055.6 15.6% 5.9% 9.7%
Average 11.4% 6.0% 4.8%
Success rate^ 100.0% 100.0% 68.8%
Source: NSE Indices Ltd., SBI, internal calculations. * FD = Fixed Deposit
^ Success rate is the frequency the respective data point has exceeded 0
Investment in equities can be riskier and volatile than investment in fixed deposits.

The table above shows how much Miss Fortune would have earned on
each poorly timed investment if she held it for 5 years. She would have
earned a positive return on her investment in each of the 5 year instances
from 2001-16. While the 5-year return for her investments in 2007 and
2008 was low at ~0.2% CAGR, she still avoided major losses.
 Additionally, her investments in equities would have done better
than Fixed Deposits (FDs) on average, despite her consistently poor
timing. The 5-year CAGR of her equity investments exceeded the
5-year average of 90-day FD rates in 11 out of 16 calendar years, a
success rate of ~70%. If Miss Fortune assessed her returns after 7
years instead of 5 years, her ill-timed equity investments would
have beaten FDs 80% of the time (12 out of 15 calendar years).

These historical results show that even if we go

wrong in timing the market, given enough time,
we can expect to be rewarded for our patience!

For more details write to us at hello@hdfcfund.com

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