'Constant churning won't maximize returns’

MUMBAI: Buying and holding has become an old fashioned idea for many investors, including mutual fund investors . They want to churn their portfolio regularly to maximize returns. At least, they claim so. If the schemes in their portfolio are underperforming even for a short period , they would dump them and move to schemes that have posted scorching returns during the same period.Do they maximize the returns by such constant churning of their portfolio? No, says experts. Let us see why they say so.
Take a look at the imaginary portfolio (provided by an MF industry source) of an investor , who constantly chased the best performers on a regular basis since the last 10 years. In 2000, the investor put Rs 1 lakh in Birla Sun Life Equity Fund, the top performer at that period. After two years, the investor shifts his investments into JM Basic Fund, the best performer in 2002. In 2004, the money is shifted to Franklin India Prima Fund, the top performer for the previous two years. In 2006, the money is again shifted to SBI Magnum Global Fund 94 (the outstanding performer for the previous two years) and into IDFC Premier Equity Fund-Plan in 2008.
Now let us see what happened to the imaginary investment after 10 years. After the relentless chase of top performers , the Rs 1 lakh corpus has grown by just Rs 50,000 in 10 years. That is a compounded annual growth rate of 4.03%. In fact, if the investor had stayed on with Birla Sun Life Equity Fund, he would have made around 23.12%. The same is the case with consistent performers like HDFC Equity or DSPBR Equity in the same multi cap category. Both the schemes have returned around 31.91% and 26.59% respectively in last 10 years.
“Higher returns come from investing in good quality companies and remaining patiently invested as the investment thesis plays out rather than churning portfolios."