Investor education is a must for equity investment to educate investors towards treating equity as a long-term investment and inculcate the ability to stay patient through sharp equity drawdowns.
Equity capital markets have been buoyant for the last few years. So far in 2018, there has been a rocky ride with the markets correcting and then making new highs lately on the back of a sharp appreciation in certain stocks. Retail investors have been the backbone of the markets, with investments through diversified equity funds and balanced funds. Systematic Investment Plans (SIP) have been the preferred route and their flows have been increasing every month, which currently stand at Rs 7300 crore/month. In addition, lump sum flows have only added to the overall flows. In fact, it is the strong domestic flow in the capital market that has acted as a counterbalance to volatile foreign flows.
Equity fund returns have been attractive over the last few years, which has given confidence to investors to enter the markets even as they tread into higher valuations. One of the concerns is that some of these investors have not seen a true bear market cycle and it is difficult to predict their reaction if the markets do correct sharply. That is where investor education is a must to educate investors towards treating equity as a long-term investment and inculcate the ability to stay patient through sharp equity drawdowns.
To understand this concept better, let’s study the historical performance of Indian stock indices. Sensex and NIFTY have been the flagship indices for the Indian equity markets and have seen a huge appreciation through the years, but at the same time, there have been several sharp corrections. For instance, had you invested just prior to the Harshad Mehta scam in 1992 or before the Global Credit Crisis in 2008, your investment would be down by 40-50% within a year! Similarly, the market witnessed crashes during the Asian credit crisis in 97-98 and the dotcom crash in 2000-01. But the markets did bounce back eventually and those who chose to stay invested reaped the benefits.
Rolling Returns of NIFTY since inception for different holding periods:
|Returns/period||1year||3years||5 years||7 years||10 years|
|% of periods with -ve Return||33.23%||17.24%||8.41%||6.33%||0.32%|
Let’s analyze the data above. If you had invested in equities with a 1-year investment horizon, there is a 1 in 3 chance that your returns would have been negative, which is not a great outcome. Extend your holding period to 3 years and the chance of making negative returns is less than 1 in 5 (less than 20%). As you keep extending the investment time period, lesser the chance of making a negative return on your investments. For a 10-year holding period, the NIFTY has had a negligible number of periods with negative returns (only if invested just before the Harshad Mehta scam days of 1992). In fact, had you invested in the NIFTY on any day in the last 20 years and held on to your investments for at least 7 years, there wouldn’t be a single period where you lost money. Most other indices displayed similar trends, including the more volatile mid-cap indices. While the standard caveat follows – “Past returns may or may not be repeated”, this trend does instil confidence that staying invested in the markets for longer periods pays rich dividends, but you need to be patient.
The Indian equity markets seem to be in a consolidation phase now, although flows have been strong. There are several headwinds- we are heading into an election year, corporate growth is yet to come back in a robust manner, US Fed is contracting its balance sheet, trade wars and geopolitical tensions lurk. Investors looking to enter the markets now wonder if the markets are expensive and are there a correction around the corner? The honest answer to that is, no one can really predict it. Instead of trying to time the market, the best strategy for an investor would be to come in through the SIP route and have a clear investment time horizon of at least 7-10 years in mind, as there could potentially be volatile times ahead. But if you set your expectations right and stay patient, there is a lot of wealth to be created by investing in the equity markets.
( by Mr. Kaustubh Belapurkar, Director Manager Research, Morningstar Investment Adviser India Pvt. Ltd)