Markets never give returns in a linear fashion. No matter how sound the market or the company is, it's return would always rise in a non-linear manner.
Equities as an asset class are known for their potential of superior wealth creation over the past few decades. Nifty has multiplied ~50X since India has embarked upon Liberalization, Privatization & Globalization (LPG) reforms in 1991. The journey though has not been linear and has seen several episodes of extreme volatility.
For instance, Feb-March 2020 saw swift & sharp ~30% correction and the returns since then have been equally stupendous. As an aftermath, the current rally has also lured a lot of retail investors to foray into equity markets and retail investors have adopted the DIY strategy in Equity Investing. This is exemplified from the fact that 1.5 crore new Demat accounts have been opened over the last 18 months. While it is quite encouraging to see the Indian youth taking a plunge into the equity market, the fear is that the new age investors have only seen the markets on a rising trend and have not seen much drawdown in their portfolio hitherto.
There is an inherent risk that investors may get carried away with the initial up move, but the real litmus test would be when the markets correct and then whether these investors will emotionally be able to see their portfolio in losses and still not panic and make wrong investment decisions.
There are certain things that don’t change over a period of time and from equity markets’ perspective, Greed & Fear are two such emotions. History is flushed with examples of where Greed & Fear have impeded investor’s ability to take rational decisions (and have indeed repented later). One must invest when everyone is fearful and asset classes are available at reasonably good valuations. Markets never give returns in a linear fashion. No matter how sound the market/company is, it’s return would always rise in a non-linear manner.
Post the resounding move over the last 18 months, the most pertinent question from an investor’s standpoint would be- how one should position themselves in the incumbent market environment? Our opinion is that the longer-term outlook for the markets is quite sanguine. Government policies are conducive for propelling growth higher. The budget for 2020 was a seminal change in the attitude of the government wherein fiscal conservatism paved the way for CAPEX led growth. Monetary policy globally is also likely to change slowly but would remain constructive for an elongated period which is also supportive of growth. Though the current valuations are no longer compelling, market is drawing comfort from improving profitability, rising ROE’s, abundant liquidity and significantly deleveraged balance sheets.
However, as we continue to move higher, the investors need to be cognizant of the inherent behaviour of markets, which is Greed Vs Fear. Currently, the fear is mostly missing in the environment. Rebalancing of Portfolio is one of the time-tested ways to manage this conflict and avoid a panic situation in case of drawdown or sharp correction. We urge that investors should continue to rebalance their portfolio as per their asset allocation needs and risk profile frequently for better investment experience. Discipline is the single most important factor that determines the long-term success for an investor.
Rather than continuously trying to find the new theme or trends to invest in, the investor should adopt a portfolio approach, wherein Asset allocation call is the most imperative call that any retail investors should take. While equities are indeed an essential part of the portfolio for wealth creation, the investors should also be cognizant of other investment vehicles in order to build a diversified portfolio and generate stable and consistent returns. In case the investor does not have the requisite skill sets to do stock picking, he can partake in equities through various alternative investment vehicles such as ULIP, Mutual Funds etc. This would leave the onerous task of picking new theme or trends to the professional money managers/fund managers.
One must be mindful that volatility, sharp up move and corrections are an inherent part of the markets and are here to stay. But staying on the course and keeping the investment discipline is what makes someone a successful investor. If you’re investing for the next five – ten years’ horizon, then your focus should be on the opportunity and the way to harness it. One should keep investing and keep rebalancing their portfolio as per goals.
(By Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance)