The last three years since Covid struck have been an evolutionary phase for the Indian stock markets, which has marked the entry of a significant number of new investors. During this time, despite the investors being new, both the markets and the retail investor have shown significant signs of maturity. Two data points that I share to underscore this.
The number of demat accounts in India has more than jumped threefold in just four years – from 35 million in end-FY19 to 115 million in end-FY23. These new investors came in post Covid and hence saw only the one-way upwards market rally till end-December 2021, by when the markets more than doubled from their Covid lows.
But the next 15 months between January 2022 and end-March 2023 saw a protracted time correction, during which the patience of these new investors was severely tested. Despite this, unlike earlier times, these retail investors did not flee the market and were in a way the bulwark (evidenced by the equity SIP book that not only did not shrink but kept being topped up) that kept the Indian markets stable, despite record highest-ever FII outflows from India during this period.
This retail investor, who showed the maturity and patience to stay on course, has been justly rewarded in the last three months from April 2023 to June 2023, through the sharp up-move.
That said, as happens in typical boom markets, there are still investors hopping onto this bus. In our experience, these are usually investors who while otherwise wary of equity markets and their volatility, are emboldened by the recent performance as well as are drawn in by the FOMO (fear of missing out) effect. For the investors who are entering the markets now, the following three pointers would be pertinent to note as they experience the various shades of the market over the next few quarters.
Enter with a long-term view
Irrespective of when you enter, as an equity investor you will do well to remember that the money you are putting in is for the long term. All the more so when you buy when markets have already run up a bit.
Whichever source you hear or read, the medium- to long-term outlook for India even from here is very positive. That said, data over the last 40 years shows that Indian stock markets experience a 10 percent correction every year, and a 20 percent correction nearly every two years. So, don’t invest because you “feel” there is a good chance of markets doing well in the next few months. At this point of entry, hope to reap good gains over the medium to long term (3 to 5 years) but be prepared for short-term surprises.
Also read: When to start investing to get to that Rs 10 crore portfolio?
Choose carefully
Paraphrasing a popular financial quote – A rising tide lifts all boats, even the ones that are not seaworthy. Hence, it is all the more important that in the hurry to enter the market, you don’t discard your research lens. If it is stocks you are investing in, be clear about your investment thesis and the fundamental reasons you see for the stock doing well. Similarly, if it is a fund, then make sure that you (or the person you are taking a recommendation from) are spending enough time ensuring that your selection is crossing all the necessary hoops.
At this point, there will be many stocks that have already done exceedingly well. Hence, important that what you are investing in is not just momentum-driven, but also has the fundamentals to back it up. Remember, when you buy only in the hope that someone else will buy it from you at a higher price later, you have fallen victim to the “greater fool” theory.
This is also a good time to get your portfolios reviewed and discard any long-term laggards, if any, to make the portfolio more future-oriented.
Also read: Nifty 200 Momentum 30 Index rebalancing: 11 new mid-cap stocks that entered the index
Don’t be greedy. Be measured about the risk you take
There is a narrative at present that this is a good time to invest in smallcaps from a relative valuation attractiveness perspective. While that may be true, one needs to be careful because the volatility that smallcaps have is not something everyone has the stomach for.
Similarly, taking sectoral calls at any point is inherently more risky. Just as an example, at this point, there are two conflicting narratives out there. One is that the India consumption story is taking off and hence there is an opportunity in the consumption sector. At the same time, there is another conflicting narrative that there is a possibility of a global recession, which can lead to a consumption slowdown. Both these narratives are equally persuasive and which one will play out over the next few quarters is impossible to predict.
Also read: Is there a bubble in smallcap stocks? Not yet, say fund managers
Hence, unless you have excellent reasons, sticking to diversified portfolios makes sense for retail investors. In general, and even more so at this particular time, do ensure that your investment decisions are driven at the core by your asset and category allocation decisions, which is an outcome of your risk appetite and goal horizons. Do not allow short-term greed to come in the way of your long-term needs.
Lastly, do remember that heeding these pointers does not mean that you do not enter the markets at this time or only take a tentative step. As a popular saying goes, time in the market is more important than timing the market. Equities represent the best way to build wealth sustainably and satisfy your long-term needs. But significant wealth creation happens in the markets only when you remain invested for the long term, as well as participate fully. Dipping your feet in the water while sitting on the banks will neither make you a swimmer nor take you to the other shore.
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