Equities as an asset class are identified for their possible of superior wealth creation more than the previous handful of decades. Nifty has multiplied ~50X because India has embarked upon Liberalization, Privatization & Globalization (LPG) reforms in 1991. The journey although has not been linear and has seen numerous episodes of intense volatility.
For instance, Feb-March 2020 saw swift & sharp ~30% correction and the returns because then have been equally stupendous. As an aftermath, the present rally has also lured a lot of retail investors to foray into equity markets and retail investors have adopted the DIY technique in Equity Investing. This is exemplified from the truth that 1.5 crore new Demat accounts have been opened more than the last 18 months. While it is very encouraging to see the Indian youth taking a plunge into the equity industry, the worry is that the new age investors have only seen the markets on a increasing trend and have not seen significantly drawdown in their portfolio hitherto.
There is an inherent threat that investors could get carried away with the initial up move, but the actual litmus test would be when the markets appropriate and then regardless of whether these investors will emotionally be capable to see their portfolio in losses and nonetheless not panic and make incorrect investment choices.
There are specific issues that do not transform more than a period of time and from equity markets’ point of view, Greed & Fear are two such feelings. History is flushed with examples of exactly where Greed & Fear have impeded investor’s capability to take rational choices (and have certainly repented later). One have to invest when every person is fearful and asset classes are readily available at reasonably very good valuations. Markets by no means give returns in a linear style. No matter how sound the industry/enterprise is, it is return would often rise in a non-linear manner.
Post the resounding move more than the last 18 months, the most pertinent query from an investor’s standpoint would be- how one really should position themselves in the incumbent industry atmosphere? Our opinion is that the longer-term outlook for the markets is very sanguine. Government policies are conducive for propelling development larger. The spending budget for 2020 was a seminal transform in the attitude of the government wherein fiscal conservatism paved the way for CAPEX led development. Monetary policy globally is also probably to transform gradually but would stay constructive for an elongated period which is also supportive of development. Though the present valuations are no longer compelling, industry is drawing comfort from enhancing profitability, increasing ROE’s, abundant liquidity and drastically deleveraged balance sheets.
However, as we continue to move larger, the investors will need to be cognizant of the inherent behaviour of markets, which is Greed Vs Fear. Currently, the worry is mainly missing in the atmosphere. Rebalancing of Portfolio is one of the time-tested approaches to handle this conflict and steer clear of a panic circumstance in case of drawdown or sharp correction. We urge that investors really should continue to rebalance their portfolio as per their asset allocation wants and threat profile often for greater investment encounter. Discipline is the single most crucial element that determines the extended-term achievement for an investor.
Rather than constantly attempting to discover the new theme or trends to invest in, the investor really should adopt a portfolio method, wherein Asset allocation get in touch with is the most crucial get in touch with that any retail investors really should take. While equities are certainly an critical component of the portfolio for wealth creation, the investors really should also be cognizant of other investment autos in order to develop a diversified portfolio and create steady and constant returns. In case the investor does not have the requisite talent sets to do stock choosing, he can partake in equities via many option investment autos such as ULIP, Mutual Funds and so forth. This would leave the onerous activity of choosing new theme or trends to the experienced income managers/fund managers.
One have to be mindful that volatility, sharp up move and corrections are an inherent component of the markets and are right here to keep. But staying on the course and maintaining the investment discipline is what tends to make a person a productive investor. If you are investing for the next 5 – ten years’ horizon, then your focus really should be on the chance and the way to harness it. One really should preserve investing and preserve rebalancing their portfolio as per objectives.
(By Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance)