When Covid-19 came to light in early 2020, equity markets world over came under pressure. When restrictions were imposed in the form of a lockdown in March 2020, markets crashed. Soon after, the markets began a sharp rise which continued till October 2021. Since then, the market has been largely remained stagnant. In October 2021, for instance, the BSE Sensex was at 61,300, same as in in November 2022. There were some significant corrections and advances in between but it is only recently that markets came off the range and touched an all-time high level of 63,200 in early December 2022.
It is often reiterated that the Indian equity markets are over-valued compared to other developed market equities and hence investors should exercise caution. However, no one can be certain what direction the market will decisively take in the near term. The calls for caution due to markets being over-valued were also prevalent in early 2021, when markets kept on rising. In the long run, though, it is highly likely that the markets could move upwards. There are objective reasons behind this assessment.
Promise of the Indian Economy
India is among the fastest growing economy globally. In fact, recently India became the fifth largest economy in the world, surpassing the United Kingdom. As a part of the China + 1 strategy, many global manufacturers are keen setup their manufacturing unit in India. As a means to aid this, Indian government has taken up building infrastructure as the top priority, a move which is likely to have ripple effect across the board. Indian businesses are upbeat about the economic prospects and bank credit growth has been robust in recent months. All these factors point out to a bright future for the Indian economy, which will benefit Indian businesses. The same will also be reflected in corporate earnings and equity returns over time.
Historical Trends of Different Investment Avenues
While past returns cannot guarantee future results, they do serve as indicators on what is to be expected on a broad level. Sample this, the Fixed Deposit returns in year 2000 were upwards of 10%. At present, after several rate hikes by the Reserve Bank of India, the best FD rates are around 8%. On the other hand, the CAGR returns on the BSE Sensex index between January 2000 and early-December 2022 is upwards of 11%. Some actively managed mutual funds and specific sectors have performed even better. As economic development gathers pace, corporates too are bound to benefit and the same will be reflected in equity markets as well.
What Should Your Approach Be?
As a retail investor, sticking to the basics while investing in Indian equities appears to be the best strategy at present, given India’s rapidly improving position in the global pecking order and economic runway ahead.
First and foremost, invest consistently in line with your financial goals keeping in view your risk appetite and asset allocation. The second most important action is not panicking even if the market turn volatile or enters a correction mode in the short run. The inflationary pressure and geo-political developments may cause some near-term volatility. Selling in panic and holding on to cash might give you some relief, but this relief will be short-lived. As markets pick up pace, your sense of fear might prevent you from investing again. By the time you overcome that feeling, the markets would have taken a leap. Logically, the best you can do now for your portfolio is to stick to your asset allocation plan and not do nothing to disrupt it. In simpler words, hold on to your equity investments.
Lastly, deploy some of your surplus cash in equities if you have the risk tolerance. The logic is that the equity markets have already witnessed a time correction over the last one year. Accordingly, you are getting equities at a relatively attractive price. In case of any corrections further, you can invest in tranches to strengthen your portfolio. In the long run, equity accumulated over a complete market cycle couple with the compounding effect will deliver returns which may take you by a positive surprise.
To sum up, markets being at an all-time high level should not deter you from investing in Indian equity markets. Choosing well-managed equity mutual funds can provide an opportunity to invest in equities while having adequate diversification in your portfolio.
The views are personal and are not part of the Outlook Money editorial Feature
Rohit Raman, Director, Blueant Finserv Pvt Ltd