Form is Temporary, Class is Permanent

But history has proven that it is just a matter of a few games before these quality players regain their form and reach even greater heights. There is a famous phrase often used for such players, ‘Form is temporary, but Class is permanent’.  On the other hand, some players may have stellar performances, who may even achieve world records, but they cannot find a place in the team for the long term because they cannot perform on a sustained basis. As fans, we tend to idolize such cricketers in the short term, but the names we finally remember are those that show class and quality over the long-term.

This short-sighted approach is common not only in cricket, but also in case of mutual funds. For instance, most investors seem to have fallen into the ‘recommendation trap’ and want to know the best-performing fund as they strongly believe that this is the secret to wealth creation! But in the search for ‘instant gratification’, they ignore funds with a strong long term track record. 

When we buy any product that we expect to own for a long time like a TV, car or washing machine, we check its durability and resilience over time besides its performance, but tend to overlook these factors when we buy equity funds. In fact, a product which works well in shorter time frames need not necessarily work well over longer periods. 

Hence what one should seek is optimum returns and not maximum returns. In other words, choosing a fund which gives higher returns for a commensurately lower risk (volatility) as measured by risk adjusted returns.

Creating wealth by investing in funds basis short-term performance is only possible if one is able to perfectly time entry and exits to encash the high short term returns before the market cycle changes. The reality, however, is that timing the market is very difficult and there is a very high probability of an error which can significantly impact portfolio returns and the ability to meet financial goals. Hence it has been rightly said that ‘time in’ the market is more important than ‘timing’ the market. 

A goal-oriented investing approach, based on a sound evaluation of a fund over a sufficiently long period, and that too not purely basis past performance, but after also considering qualitative filters like People, Philosophy and Processes (3Ps) followed by the fund house may help deliver the desired outcomes.

While individually, it may be difficult for investors to monitor these attributes, seasoned investment platforms like the Dreams into Action (DiA) platform of FinEdge may be able to help investors follow the above approach. DiA focuses on enabling the investment expert and the investor to have better conversations (customisation), setting correct expectations (understanding investing belief), finding investment purpose (goal setting), joint decision-making (building conviction) and then investing in the right products (Mutual Funds) by following a disciplined strategy (Systematic Investing) to meet their financial goals. 

The platform is both high touch and high tech where technology acts as an enabler for the investment manager, who in turn acts as an enabler for the investor. This combination, which helps to combine the science and psychology of investing, is a key differentiator for DiA which focusses on the journey and not just the destination, thus helping long term investing.
Such a transitioning of investors from returns-centric investing to goal-oriented investing is likely to result in vastly improved investing behaviour, more resilience through the ups and downs of markets, and better chances of goal achievement.

 Conclusion

I would take a leaf from the initial cricket example and recommend that investors must avoid choosing funds looking only at their current ‘form’ (performance) as form could be temporary but must go a step further and look for funds with ‘class’ (strong long-term risk adjusted returns) which is more permanent. Class is a combination of 5Ps – People, Philosophy, Processes, besides Performance and Portfolio. Remember, the last 2Ps are merely outcomes if the first 3Ps are right.

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