February 2019 Newsletter

<This is an extract from our February 2019 newsletter to clients>

Investor Behavior – Returns will come

While 2018 was a tough year for most investors, the optimism is still there. Many investors remember the 2017 performance of their stocks and believe that returns will come back in 2019-2020. While investors have enough maturity of thought to understand that returns are not a given and that there could be periods of negative returns, they tend to forget that the market has a 3rd dimension as well – Flat / range bound.

Many investors are assuming that the Small / Mid-Caps will bounce back and deliver stellar returns over the next 2-3 years. The expectations of 15% CAGR from their equity investments are still alive.

Nifty 10 year chart (1992 to 2002)

The above chart shows the movement of the Nifty index from 1993 to 2003. As you can observe, the index remained in a range and delivered no returns. Typically, such a range bound movement happens after a strong rally (something like a 2x-5x move).

In the hindsight, we know that the Nifty / Sensex delivered 12% to 15% CAGR and the “power of compounding” is engraved in our mind. But imagine if you were an investor who had invested in equities in 1993 and was witnessing no returns for many, many years. Wouldn’t you eventually lose interest in equity investing? The point is that many investors still have that expectation of getting multibagger returns. The blame is not on the investors but on the entire community of brokers, advisors, funds, etc. who preach the risk and return part of investing but don’t talk of patience.

In no way are we saying that the next decade will be like the decade between 1993 and 2003, infact the 2008 to 2018 period was a dull period in general for the market and most of the returns just came in the later years (2014 to 2017). Investing in equities and equity funds should have a multi-decade outlook to create wealth that can make a difference. If you start with Rs 3 Lakhs today and turn it into Rs 6 Lakhs by 2022, it would not have any drastic impact on your lifestyle.

What should investors do?

As a retail investor, split your equity investments into direct stocks, equity funds (including ELSS), PMS (if you net worth is > Rs 2 Crores) and other such avenues. Also, continue with SIPs into mutual funds of any amount that you can set aside every month. In range bound markets, you keep collecting units at low NAV values and once the market witnesses a strong period of high returns, you really see your wealth grow.

Infact, in the long run the range bound markets and bear markets are the best friends of an SIP investor. They let you purchase more units at lower NAV values. As your investment keeps increasing, the potential returns you will generate in the future keep increasing too!

Let’s assume you started with a Rs 5000 SIP at the start of a bull market, your entire returns will come on the initial investment which is hardly Rs 60,000 a year! Now, if you start investing and the market is flat for 3 years, your investment would be in Lakhs and whenever a bull market starts, your portfolio will deliver returns in Lakhs! So, if you are an SIP investor, your prayer should be for a dull market in the initial 6-7 years of investing.

I would take this opportunity to convey a social message – Please Vote. We are the lucky few people who have the right to elect / throw away our Governments. Our forefathers gave their blood & sweat to make this Democracy which is one of the most successful democracy in the world! If you don’t have a voter id card or if your name was deleted from the rolls then you can enroll online. If you are a registered voter, then just re-check your name online.

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