Markets recover faster than investor confidence: Kotak’s Nilesh Shah on the gap between returns and sentiment

Markets recover faster than investor confidence: Kotak's Nilesh Shah explains why and how

Even sharp equity corrections of 30–40% have historically been temporary, with most drawdowns recovering within two to three years. Yet, investor confidence typically returns far more slowly, creating a persistent gap between market recovery and investor participation, according to Moneycontrol's analysis of FundsIndia’s latest long-term market drawdown and recovery data.

The data shows that while volatility has been frequent — especially in mid- and small-cap indices — long-term negative outcomes have been rare. Notably, the data shows no instance of negative seven-year equity returns across the periods studied.

Despite this, investor caution often lingers well beyond the recovery phase.

In an interaction with Moneycontrol, Nilesh Shah, managing director, Kotak Mahindra Asset Management explained, “Markets tend to recover faster because they are driven by earnings, liquidity and forward expectations.” He goes on to add, “Investors, however, are human. Loss aversion means the pain of a correction is remembered far more vividly than the subsequent recovery, so caution persists even as markets start pricing in better outcomes.”

Markets, Shah said, often price in recovery before certainty appears, while investors wait for comfort and confirmation — by which time a meaningful part of the rebound is already behind them.

FundsIndia’s data also highlights that equities — particularly mid- and small-cap indices — spend a significant portion of their time in drawdowns, even though long-term losses are uncommon. This has reinforced a tendency among investors to equate short-term volatility with long-term risk.

“Many investors still confuse volatility with long-term risk,” Shah said. “Sharp price swings are normal, especially in segments with lower liquidity and higher growth sensitivity. But the risk of permanent capital loss over long periods in quality equities has historically been far lower than what these drawdowns suggest.”

One of the more striking findings in the FundsIndia report is the absence of negative seven-year equity returns across market cycles, reinforcing the importance of time in the market.

“The data underscores the power of staying invested through cycles,” Shah said. “Corrections feel uncomfortable, but history shows they have consistently been followed by recoveries and new highs.”

Yet behavioural biases often dominate decision-making.

“Periods of market stress leave a deeper emotional imprint than gradual recoveries,” Shah said. “Fear during drawdowns is amplified, while recoveries tend to be quieter — even though the data shows they are often swifter than expected.”

While the current market environment faces global uncertainties, Shah said historical recovery patterns remain broadly relevant.

“Cycles don’t repeat in the same way, but they do rhyme,” he said. “Discomfort has repeatedly created long-term opportunities in equities, even though near-term volatility can persist.”

FundsIndia’s analysis suggests that while drawdowns may continue to test investor patience, market recoveries have historically arrived sooner than sentiment — a mismatch that continues to shape investor outcomes across cycles.