Equity investors: Beat stock market blues with disciplined investment

Written by Rajiv Bajaj | Updated: Nov 20 2013, 16:42pm hrs
Equity marketEquity investors have been reeling under the impact of low returns and high volatility since 2008. (AP)
Equity investors have been reeling under the impact of low returns and high volatility since 2008. However, fixed income took centre stage and seemed to be providing some relief. The period from December 2011 to May 2013 was particularly good for debt-fund investors as bond yields dropped from their highs in November 2011.

For instance, 10-year yields dropped from 9% to 7.3% during this time, handing out attractive mark-to-market gains to investors. However, the sharp volatility in the currency and bond yields since June this year took away even that from investors, wiping away whatever had been accrued to investors over the past couple of months. Even short-term debt funds and liquid funds saw negative returns in July. Returns in equity funds over one- to three-year period have been below the corresponding period bank deposit rate.

We may not realise it, but this high volatility in even the supposedly safer asset classes has made us extremely cautious and risk averse. We now think twice before considering any risk investment. Our natural tendency is to park money for the next three to six months, and then wait for some sort of certainty to emerge before deciding the future course of action. We are simply not willing to commit for a longer period.

What investors, however, fail to understand is that waiting for even two months can cause them to miss a bulk of the returns that can accrue from stock markets in future. To make money in the markets, one needs to be counter-intuitive. The need for disciplined investing and or counter-intuitive investing has never been felt more.

Stock prices should sooner or later reflect the corporate earnings growth. In fixed income, most of the debt funds, especially those following a low duration, high accrual strategy have the potential to deliver returns in line with the carrying yield of their portfolios, over their stated average maturities.

Over a longer period, the only factor that drives the market and different asset classes are the fundamentals. In the short term, there can be many other factors such as liquidity and investor sentiment that are hard to predict.

It is not a very popular concept to consider debt funds over an SIP. A study conducted in our research centre revealed that if somebody had started an SIP as well as also invested lump sum in 10 popular debt funds five years ago, he would have got a return of 6.7% per annum from SIP and 7.8% per annum from the lumpsum investment. Moreover, if you want to enjoy the growth potential of equity markets but at the same time are not willing to take the risk of capital loss, investing in capital protection-oriented funds with a three- to five-year tenure is a good option.

Today, looking at the stock market index, one will not be able to predict which way the markets are headed and when the next rally will come. But one thing is reasonably certain stocks of many companies are available at attractive valuations. These are mid- to large-size companies with a consistent track record, good dividend yields and a healthy growth rate. Only those investors whose thoughts are contrarian are willing to look beyond the noise of pessimism. Such investors will serve themselves very well in terms of their portfolio performance over a longer period.

* The writer is vice-chairman and MD, Bajaj Capital