Despite the increased interest in equities since the Covid pandemic in 2020, partly because of the advent of the work-from-home phenomenon, out of the nearly Rs.24 lakh crores that Indian households save in the form of financial assets in a year in recent times, as per RBI data, less than 4% is invested in equities. Out of the nearly 138 crore population of India, as per NSE data, there are only about 1.2 crore active investors, though around 7 times that number invest through Mutual Funds in India. The rather low level of participation in Indian equities compared to the developed economies is a matter that warrants closer examination. Clearly, one of the reasons for this low level of participation in equities is insufficient information available about the merits of investing in equities. Among many educated and reasonably well-to-do Indians, not investing in equities is sometimes treated as a badge of honour.
If truth be told, there is enough anecdotal evidence to suggest that several well-placed businessmen and professionals, senior officials of successful corporates and financial institutions, including regulators can be counted in this group. This group certainly has enough access to information about investing but the more credible reason for their refrain from equity investing is because of the several wrong notions and myths surrounding equity investments that they have come to believe. As we celebrate the 75th anniversary of India’s independence, it is time for us to work towards achieving freedom from Investment myths that cast equities in poor light in the eyes of the average investor.
One of the most important continuing myths about equity investing is the notion that investment in equities is no different than gambling with one’s savings. Would we consider it a gamble if an investment has generated a compounded annualised return of more than 15% over the last 43 years, which means Rs.1 lakh has grown to a stupendous Rs.5.88 crores during the period? This is the performance of the Sensex over the last more than four decades of its existence without factoring the regular dividends received. Of course, this return has not been uniform over the period, with 14 of the 43 years generating an average 16% negative return p.a. but with the rest of the 29 years generating a robust average of 41% return p.a. This performance cannot obviously be equated with gambling nor stock markets compared with casinos.
Needless to say, there are several listed companies that have failed their investors over the years and the odd investor who takes concentrated bets on a few such stocks may infer that investing is a losing game. This is far removed from serious investing which requires a professional analysis of the various factors that can influence a company’s stock performance before investing. Let us compare the compounded annualised returns of comparable asset classes over the last 40 years till 2021 – gold @ 8.4%, silver @ 7.1% and Bank fixed deposits @ 8.7%, whereas the Sensex has generated nearly 15%. With inflation at 7.1% during the period, equity investment has not only proved to be the best investment avenue but has beaten inflation by a handsome margin.
Another popular myth surrounding investment is the one about market timing. While buying at the lowest point in a bear market and selling at the top of the next bull market is certainly quite rewarding, the bottom and the top of the market are almost impossible to time consistently. Several studies have clearly shown that for the long term investor, perfect timing is not a very important determinant of eventual investment performance. For example, an investment in the Nifty index held for any 7 continuous years has not only a zero probability of losing money but has consistently generated inflation-beating returns. This suggests that almost anytime is a good enough time to start investing and waiting for the perfect timing does not change the return profile significantly over the long term.
There are several other investing myths like low-priced stocks offering the best value, the most popular companies offering the best investment opportunities and the ultimate myth about that unheard of equity share that is all set to be a sure-fire multi-bagger. Neither a low priced share nor a company whose products are well known are sufficient reasons for a stock to do well. One certainly has to beware of the share that is spoken of in hushed tones about getting to be a multi-bagger in the next few days. Not investing in equities is not really an option to the investor because all other assets have generated much less compounded annualised returns over the last several decades and given the growth momentum in the country, the situation is unlikely to change anytime soon. Investing is best done after an analysis and understanding of the various factors that can improve profitability and growth of the Company. If one does not have the time or the inclination to understand these nuances, seeking professional advice or investing in broad-based index funds are good alternatives to participate in the best-in-class returns that equity markets help generate.
This article is authored by UR Bhat, Co-Founder at Alphaniti (www.alphaniti.com)
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