Moneycontrol
Oct 28, 2017 04:30 PM IST | Source: Moneycontrol.com

Want to strike it rich with equity markets? Trust long term equity investing

Instead of trying to time the market, the best strategy for an investor would be to come in through a 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.


Kaustubh Belapurkar

Morningstar India

The equity markets are buoyant and have been making new highs lately. Retail investors have been actively investing in the markets largely through Diversified equity and balanced funds.

Systematic investment plans (SIPs) are the preferred route for investing and have been increasing every month, currently standing at Rs 5,500 crore a month.

In addition, lump sum flows have also been robust over the last year. In fact, lately strong domestic flows have acted as a counterbalance to volatile foreign flows.

Equity returns have been spectacular over the last few years, which has given confidence for investors to enter the markets even as they tread into higher valuations.

One of the concerns is that many 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 them towards treating equity as a long-term investment and the ability to stay patient through sharp equity drawdowns.

Let’s look at 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.

chart5

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. As you kept extending the holding period, the 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 midcap indices.

This truly displays that staying invested in the markets for longer periods, pays rich dividends, but you need to be patient.

The Indian equity markets are in a great boom phase now, flows have been strong, but there are some headwinds- corporate growth is yet to come back, US Fed is looking to contract its balance sheet and geopolitical tensions lurk.

Investors looking to enter the markets now wonder if the markets are expensive and if there is 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 a 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.

Disclaimer: The author is Director of Fund Research at Morningstar Investment Adviser. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions
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