Great time for NRIs with staying power to invest more in India

A global recession is looming around the corner; the Brexit October deadline is coming up soon; the China-US trade war is far from reaching a conclusion, and there is a strong demand slowdown in India with growth estimates being revised downwards.

Gold is the best performing asset class with uncertainty at record highs. These are samples of the headlines that investors worldwide have been exposed to in the last few weeks.

When NRI (non-resident Indian) investors look at their India-centric portfolios, they are not happy with their returns over the last couple of years, and are wondering if they would be better served with an alternative investment  strategy—either a different asset class or maybe a different geography. When you add concerns of the possible depreciation of the Indian rupee, this combination of bad headlines and low past returns have the potential to make investors worry about the possible returns that can be made in the future as well. They may possibly end up  making drastic changes in their investment portfolios.

Timing the markets is problematic

This is exactly what NRIs need to avoid, as returns from emerging markets have traditionally been very lumpy, and tend to come in very short spurts. In fact, there is data over the last three decades which seem to indicate that missing between 1-2 per cent of the best days in Indian equity markets, has resulted in returns that are significantly lower than those delivered by bank fixed deposits. Therefore, trying to time the markets to capture that 1-2 per cent of the good days and being out of the equity markets for the rest of the days is very unlikely to actually happen, as the probabilities of being able to get this right both on the way out of equities and then back again into equities are very low.

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Vishal Dhawan

Founder & CEO|Plan Ahead Wealth Advisors

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We had recent evidence of this, when there was a corporate tax rate cut announced without most market participants and investors expecting it, resulting in some of the best returns in Indian equities getting delivered in just a couple of days. Many investors, who thought they would come into Indian equities when the news flow got better, never really got a chance to participate as the markets rose very rapidly, and by the time NRIs or domestic investors got their act together on deciding to invest, a lot of returns may have already come in. Whilst it is hard to predict whether these gains will remain or go away, it amply demonstrates the difficulty in being able to stay out of the markets when the news flow is weak, and getting back into the markets in time when the tide turns.

Testing investor patience

The other challenge for investors has been that whilst the Nifty 50 and the BSE SENSEX have remained positive over the last couple of years, most investors are seeing returns lower than those, as the returns have been concentrated in a very small number of large-cap stocks. In fact, investors with mid- and small-sized stocks or mid/small-cap mutual funds are actually seeing a bear market, which means that the stocks are down more than 20 per cent, which from a technical perspective is defined as a bear market. With the fear of more bad news, many investors want to shift either to large-cap stocks/mutual funds or move to gold or reduce India allocations. It is already close to two years since this phase started, thus creating a sense of fatigue and impatience amongst investors.

We need to remember that this is the nature of cyclicality of returns from asset classes, and trying to measure your portfolio outcome in terms of what you may have made if you had invested elsewhere is much easier in hindsight than when looking forward. In addition, a cyclical turnaround historically can take anywhere between 18 months and four years, and thus your patience may continue to be tested. However, the very nature of these investments is to test your patience, and this is actually a great time for investors who are clear about their end use of monies, financial goals and investment time horizons to stay invested and possibly invest more.

One of my favorite quotes on investing has been “ in investing, what is comfortable is rarely profitable.” Most investors may continue to be tested on the same.

(The writer is a certified financial planner and founder and CEO of Plan Ahead Wealth Advisors, a SEBI registered investment advisory firm)