July 14, 2015
For last couple months, we are witnessing regular downsides in stock market. Sensex has corrected more than 10% since 4th March 2015, the day it touched an all time high of 30,015. Selling pressure from FIIs and various domestic factors are creating doubts in the market over growth of Indian economy, hence these corrections.
The most common question coming across from existing and new investors has been, ‘Is it the right time to invest in equity funds’? Funnily, this question keeps on popping up every now and then, whether the markets are low (like in 2009) or they are high (like in 2014).
Some of the investors spend considerable time and effort to get a fitting answer to the above question. In this quest, rather than getting a clear picture, normally they get too confused. To provide clarity to investors, I would categorise them and share my thoughts on road ahead for each category of investors separately.
1. Existing investors who are invested for long term wealth creation
Indian economy, in form of its favourable demographics, abundance of natural resources, being education led society and entrepreneurial spirit,has ample compelling reasons to grow at a healthy pace for many decades to come. Not being mindful of minor (or even few major) market corrections, Indian businesses remain attractive investment destinations to create huge wealth over long periods of time.
FIIs holding in Indian markets in last 24 years since liberalisation in 1991, has increased from 0% to 24%. FIIs total investment in India since 1991 has surpassed 290 billion US dollars. In the month of May and June 2015 till date, FIIs have sold stocks worth approx. 450 million US dollars, which is not even 0.2% of their total holdings. Fear of Indian investors that FIIs will sell and run away from Indian markets completely is highly misplaced. One cannot expect FIIs to keep on investing in India without withdrawing even a single penny from their investments. Every Indian investor will also withdraw money from his investments to fulfil his financial needs. Shall we say then that the investor is running away from the markets?
Existing investors should ignore short-term market noise and instead focus on long-term growth prospects of Indian economy. They should remain invested to generate inflation beating, tax free returns to create sufficient funds to fulfil their future financial goals and dreams with ease and peace of mind. Market corrections like the current one should be viewed as opportunities to make additional investments, if possible.
2. Existing investors who may need money within next one year
At current levels, Sensex trailing P/E multiple is 19 which could be termed as 5-10% higher than long-term average. As the markets are not cheap at this point, Investors who may need money to fulfil their financial requirements within next one year should opt for debt funds like Liquid/Short Term funds to make fresh investments.
3. New Investors who wish to invest for long term wealth creation
Many new investors are weighing options to start investing in equity funds for their future goals. Last year performance of funds, positive word of mouth from peers and friends and lack of investments that can generate inflation beating returns are some of the reasons of new investors’ interest in equity funds.
The markets provide attractive investment opportunities. At current levels, new investors should invest in equity and balanced funds through monthly SIP mode. Investors who wish to invest lump sum money may choose either balanced funds or Systematic Transfer Plans (STPs). However, said that, new investors should have realistic expectations from their investments and should keep patience and remain invested for 5 years or more to make meaningful gains for their long term financial goals.
4. New Investors who wish to TRY investing in mutual funds
Under the pressure of peers, friends or hyperactive media, some individuals want to start investing in equity funds to see if they can also get the same returns as claimed everywhere. These new investors want to try these funds for 1-2 years and then want to decide if they would like to continue these investments in future. I would restate here that equity funds are meant for wealth creation over long-term. These funds may be highly volatile over short period of 1-2 years, hence one should not invest in these funds for such a short period.
Since equity based funds are worthy investment options, I would recommend new, skeptical investors to invest in balanced funds in monthly SIP mode and that too for minimum 5 years. One should allocate only that much amount to these funds which one can continue investing without a break and have patience to see it through for at least 5 years. If one wishes to invest only for 1-2 years, then short-term debt fund is a more suitable investment option.
For all new and existing investors who are investing for long term (5 years and more period) for appreciation of money, who are planning to invest for their children’s financial goals and one’s own retirement, every market correction provides an opportunity to invest more. The current market correction is also a good entry or continuation point for current investments. It is the Patience and Persistence of investor that make money for him, and not the markets.
First time investors should commit their money to equity funds with long term view only and should not get carried away by looking at last 1-2 year returns of these funds. Replication of last 1-2 year returns may or may not happen in near future hence they should not invest with a mindset of 1-2 years in these funds. Investing to TRY out equity funds for a short period is strictly a no-no.
Investors, who wish to invest only for 1-2 years, should consider investing in liquid/ultra short term/short term debt funds for safer, regular and predictable returns.
It is advised that you consult a financial advisor before making an investment decision.
Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at firstname.lastname@example.org .