transactions is a tool to enable investing in volatile equity markets.
"Sale up to 50%!” proclaims a hoarding, and we gear
ourselves to make the best of the shopping season. We are elated and plan our
weekends around the best deal in town. Be it any part of the world, most
discounts and offers on goods attract similar behavior in people.
Why not, who doesn’t like a good deal. But if
this is true, why do most of us behave in exactly the opposite manner where
markets are concerned? As the BSE Sensex dives down, and blue chips sell at
really cheap rates, we exit our market-related investments and flock to safe
and guaranteed returns. The swing in the market and the uncertainty associated
with the stocks push us away from capital markets. We become pessimistic and
reject the idea of investing in mutual funds or any product that doesn’t
provide fixed return. Perhaps, this may be because the world of finance is much
more complicated than buying a dress or a piece of furniture. A bad business
cycle or a poor macro-economic scenario results in a sustained period of
nervousness in the markets. But even so, underperforming markets offer us the
chance to buy the largest and most stable companies at a bargain.
Thus, if we follow the same logic of
discount, we should take the market fall as an opportunity to buy the
best-valued companies. All you need is surplus money that will not be needed
immediately, and the patience to wait for the markets to recover and your
discount stock to peak to its full valuation. History shows us that markets
eventually recover and scale up to the next high, although only after a
significant period of time. For instance, the Sensex had a sharp fall in June
2004, when BJP lost unexpectedly in assembly elections. After 3 years, the
total return was 204% while, the 5 year absolute returns was 212%.
So, should all of us enter equity markets?
answer may surprise those of us who have burnt their fingers in the past. It
doesn’t mean we put all our hard earned money into equities. What we recommend
is allocating a small part of savings into mutual funds as a form of
diversification, apart from our regular investments in fixed deposits and small
In the chart shown above, we can see the
common investment mistake is to enter the markets at their peak, when everyone
is euphoric, everyone makes money and everyone offers investment tips! In this
way, people end up investing when the markets are at a premium and not on sale.
Also, when the general sentiment is at
lowest, people sell off their equity portfolio, causing a loss on their
hard-earned savings. Investor sentiments graduate from optimism to
euphoria as the markets inch higher towards all-time highs, as witnessed in the
previous bull runs of 1990s, the dot-com era of 2000 and the recent 2008 phase.
Often, once the markets have risen, we buy the same blue chip shares at a
higher price, after selling them low when the market fell. This emotional
decision making at market peaks and bottoms often leads us to make the most
mistakes with our portfolios.
In life, we face several ups and downs, and learn that we
shouldn’t get too hassled when things go wrong or get overly confident or lax
when everything is rosy. Markets too move in cycles, so we need to apply the
same mantra to our equity investments. The trick is selecting sound, valuable
stock, and not letting temporarily unsettling movements unnerve us.
Think equity, start SIP
Of course, selecting a product or a stock to invest in is
tough. First of all, how can you be sure that the company stock that you are
buying will grow by 5 times in next 10 years? What can be a company's earnings
potential, and whether there are other investments which might give a better
return? If you are sure that the company's future earnings potential is good,
you can invest in it. Infosys is one of the IT companies that created wealth
for investors after a humble start in 1981. But, not all companies become
A simple way to invest is to start a
systematic investment plan (SIP) of an equity mutual fund, which is like
starting a recurring deposit into a bouquet of companies. Mutual funds have
professional managers who track and evaluate companies on a daily basis. One
can start with an amount as low as Rs. 500 for an SIP and Rs. 5000 for a
one-time investment. Alternatively, you can put some money into an Index fund,
which represents the top companies in India in terms of size and investor participation
on broad indices such as Sensex or Nifty.
As we plan for our family’s future for
retirement purpose or to fund our child’s education after 10-15 years, we can
allocate a part of our savings into equity mutual funds. Across a long-term
period, the cumulative return from equity is better than deposits. Just like
chutney or pickle which adds flavour to our palate, we can add some “equity
tadka” to our investment portfolio.
Finally, be patient with yourself and review
your investments to:
- Assess product features and charges,
underlying fundamentals, and performance
- Gauge how the possible loss on the investment
will affect you, and
- Have realistic return expectations