Why equity investment during bad times yields good results

Every investor would like to buy low and sell high. However, the reality for a typical equity investor involves buying high as the market rises, buying less when it falls, and not buying anything when the market is really down.
When the Sensex was at 3,049 and the average forward price to earning (PE) ratio of the benchmark was 10.34 in March 2003, investors kept away from equities. 

The total investment in equity funds during 2002-3 was Rs 118 crore. However, when the average PE was high at 20.56, more than Rs 52,000 crore was invested in equity funds in 2007-8.

More specifically, between October 2007 and March 2008, when the Sensex was near 20,000, the net sale of equity mutual funds was worth Rs 41,142 crore. On the other hand, just a year later, between October 2008 and March 2009, when the Sensex was below 10,000, the sale of equity funds was a negative Rs 162 crore. In the past four years (2008-9 to 2011-12), even though the markets have been down and the PE is lower, the cumulative inflow in equity funds has been a negative Rs 6,000 crore.

This is not the first time that such a thing has happened. Between 1988 and 1992, after the Sensex went up a staggering 10 times from 400 to 4,000 level and the forward PE reached an all-time high of 40 times, an equity new fund offer collected nearly Rs 4,000 crore (Rs 20,000 crore at today’s prices). Similarly, during the IT boom, billions of rupees were invested in IT, not to forget a similar trend in real estate and related sectors during 2007.

This pattern, wherein an overwhelming majority of investors mistimes the market repeatedly and consistently, is the prime reason for their unsatisfactory experience with equity and for the poor equity ownership in India. While there can be many reasons for this collective mistiming, the key one probably is that most of the investments in equity are not done with a long-term view.

This, despite the fact that the best that equity has to offer is only over long periods. This is unfortunate since investors are not benefiting from the compounding potential of equities by investing for the short term.

At 15% CAGR, Rs 10,000 becomes nearly Rs 20,000 in five years, Rs 50,000 in 11 years, Rs 1 lakh in 17 years, and Rs 2 lakh in 22 years. Due to the erroneous understanding of equities, investors target only small gains over short periods. As the horizon is short term, the entire focus is on guessing the near-term market movements.

(curtsey: economic times)

Rupesh Yatesh Dalal
Head Research Department

Website : www.marketcalls.net
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Yahoo Messenger : rupeshydalal@yahoo.com
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