Investors who wait for ideal market conditions often miss the bus. Time — and not timing — is the key to equity investing
Investing is all about putting your hard-earned money to work. At some point in our lives, we feel that we should let our money work for us — the earlier it’s done, the better. The more you sweat in peace time, the less you bleed in war. As professionals, businessmen, entrepreneurs, workers or labourers, we put our best into our job/business/profession. The simple and realistic expectation here is to earn a living, consume, save, invest, enjoy and generally pass on the accumulated wealth to the next generation or a legal heir.
To take this a step further, consider case A. Here you put your money in a fixed deposit in your bank — and earn, say, 9%. What do you do here? Nothing much! Your money is earning you a normal return. Take case B. As a businessman or an entrepreneur, your expected RoEs are anywhere between 18% and 20%. What do you do here?
You work really hard, day in day out. Consider a third approach, where you decide to invest in an avenue that returns you more than the average of cases A and B. The simple average of 9% and 20% is 14.5%. If an instrument can give you a return of a 17% CAGR (more than the average of A and B) over longer periods, isn’t it a more prudent option to invest in? Indian equities (Sensex companies) have delivered a 17% CAGR in the last 35 years.
Past returns of asset classes such as government debt, FDs, gold, or equities clearly set equities miles ahead of the rest. No long-term capital gains attach to equities. In a predominantly debt-oriented portfolio, though keeping volatility in control, the purchasing power of the corpus shrinks with time. An equity-oriented portfolio has the potential to combat inflation in the long run as the impact of volatility lessens with time. Not taking a calculated risk is undoubtedly a bigger risk.
Now, let us address the question of whether this would be the best time to venture into purchasing equities. Investors who wait for the ideal market before investing often miss the bus. So, time and not timing is the key to equity investing.
The global economy seems to be in troubled waters at this moment. Growing at 2-3% is an achievement for some countries, while some economies depend on commodities. Among these dark clouds, the silver lining seems to be India. A stable reform-oriented government, improving macro-economic fundamentals, normalisation in manufacturing growth, crude oil, inflation and interest rates heading south are some brownie points.
Factors such as strong domestic demand-driven growth, less dependence on external demand, increasing urbanisation, a swelling middle class, a decreasing dependency ratio, high savings rate and rising disposable income in India are expected to provide the requisite momentum to the economy.
The key lies in selecting and accumulating good stocks through a robust business model, a durable competitive advantage, high RoEs and good corporate governance. An investment horizon has to be clearly determined and a periodic review, re-alignment or re-structuring is necessary once the selection of securities is done.
For investors who do not have the time and resources to venture into direct equities, SIPs in mutual funds and investing via ETFs are advisable.
A disciplined long-term approach toward equity investing would prove to be the catalyst in creating, preserving and multiplying wealth. Let equities work harder for you, while you continue to work hard.
The writer is senior vice-president and head of equity advisory, AnandRathi Financial Services