To minimize the chances of loss and aim to maximize gains, one has to stay invested
for the very long haul
The domestic stock market has had much to cheer about this past year. Equity assets
have delivered and the S&P BSE Sensex has risen by more than a third. Last year,
the stock market was at attractive valuations, and many sectors were available for
reasonable valuations. (Source: Bloomberg) .
Since then, nearly all the sectors in the market have done well. From mid-caps to
small-caps, from domestic cyclicals to even traditional defensive sectors, all have
experienced improved valuations in the past year. The S&P BSE Mid and Small Cap
indices have risen 65.6% and 89.7%, respectively, since last year. (Source: BSE
India)
While there have been some years in which equities have done well and some years in which they have not on a fundamental level, equity has proved to be a better asset class over a few decades. Though, of course, sentiment-driven short-term swings dissuade people from investing here.
For instance, at this time last year, investors were largely overlooking equity because it seemed that there was more downside left in markets. But those investors, who took a long-term view and invested, were rewarded. Nevertheless, at all times, investors should consider equity as a very long-term asset class and accumulate this whenever a suitable opportunity presents itself.
If you look at the returns of the bellwether index from its 1979 base, the Sensex has seen 17.2% compounded annual growth—much higher than any other asset class, and a return that also beats inflation. (BSE India & RBI).
So, if you have decades on your side, and if you are ready to give equity sufficient time, it would translate to relatively high gains. Time enables companies to reap the benefits of scale by increasing revenue and profitability. This then translates into rising shareholder value over long periods.
Investing early and for long periods also allows you to optimize the benefits of compounding. In fact, the more time you give your investments, the greater they would grow over the years. For example, a small sum of Rs.1,000 invested every month at 15% per annum increases to a tidy sum of Rs.69 lakh over 30 years.
Besides, the case for investing in equities for the long haul is getting stronger with the Indian economy now firmly on a structural growth track. With a much lower current account deficit, larger forex reserves and upward-looking industrial production figures, the economy could get better over the coming years. Crude oil and energy prices have trended lower lately and inflation has dipped below 6%.( Source: RBI & Bloomberg).
At this level, the Reserve Bank of India is likely to draw some comfort in achieving its target of 6% inflation levels by financial year 2016. Hence, there could be a rate cut sooner or later and that presents a real opportunity to spur credit growth, which can, in turn, boost corporate earnings.
Therefore, one could see an improvement in profitability over the next few years. Even with the stock markets at all-time highs now, there is still room to rise further. The factors that characterize a stock market peak, such as high industrial production and considerably lower inflation and interest rates, are still some time away.
It also does not matter at what level the market is if you are a long haul investor and keep investing steadily. Studies have shown that even if you have bought good companies at different peaks in the market but have held them for decades, stocks have delivered reasonable returns. In the stock market, you have to be a distance runner rather than a sprinter.
Even now, despite the rising valuations and after factoring in last year’s significant rise in the market, investors can and should gradually accumulate good equity funds at this point.
In fact, investors should look for and continue in well-managed diversified equity funds that can straddle different market caps, and those who missed the bus could consider funds with defensive strategies that have the ability to generate cash by selling at market peaks and buying more whenever the market is cheap.
Keep in mind that in equity investment, to minimize the chances of loss and aim to maximize gains, one has to stay invested for a very long haul, and keep accumulating whenever there is an opportunity. The global markets, too, may see some headwinds and that may present opportunities to invest in equity funds. But again, picture the long horizon. Patience in equity markets is rewarding, and the longer one invests and waits, the better can be the rewards.
Nimesh Shah is managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd.
This article was published in Mint newspaper on 27th November 2014.