Hot tip! How to invest in share market for beginners; check out this cycles mantra
Just as the economy, businesses and companies do not grow in a linear manner but perform in cycles, so do equity markets. While the Sensex (as a barometer of the equity market) has given over 17% compounded annual return for the last 15 years, this has not been a one-way upward journey.
Far from being influenced by the logical, rational considerations, stock markets are driven by deep-seated emotions such as fear, greed, panic and the herd mentality. No matter how savvy or experienced, financial investors often let bias, overconfidence, and emotion cloud their judgment and misguide their actions. Have you ever wondered about what factors drive the stock market?
While the stock market is a complex place, we do know a few things about the forces that move markets up or down. These forces fall into three major categories – fundamental, technical factors and market sentiment. Evaluating the right time to invest involves detailed analysis using Fundamental factors such as Earnings per share (EPS) and Valuations (Price to Earnings P/E). Technical indicators are many and include trend analysis, liquidity, inflation, to name just a few.
Market sentiment refers to the psychology of market participants and this can be the most difficult category because we know it is extremely important but we don't really understand what drives it. Market sentiment is often subjective, biased and obstinate. For example, you can make a great judgement about a stock's prospects using available data, and the company may do extremely well, but the market may dwell on a single piece of bad news or 'sentiment' that will keep the stock artificially high or low. And this mispricing can continue for a long time before the market notices the strong fundamentals and rewards it.
So keeping in mind all of this how does one decide when to invest in equity markets?
Just as the economy, businesses and companies do not grow in a linear manner but perform in cycles, so do equity markets. While the Sensex (as a barometer of the equity market) has given over 17% compounded annual return for the last 15 years, this has not been a one-way upward journey. In the last two decades, the stock market has had many periods of upswings and downswings of varying time periods and intensity. During the long bull market of 2003-08, the index gave an impressive 600% positive return, and conversely in the global financial meltdown of 2008, shaved off 63% from the Indian markets in just a little over a year!
So clearly, equity investing can be a tricky asset class to navigate. The answer to approaching this problem lies in the often repeated saying "Time in the market beats timing the market". What this means is focus on buying and holding for the long term. Invest regularly in all market cycles using tools available through equity mutual funds such as SIPs and STPs. This will help to stay away from the vicious cycle of greed and fear, allowing investors to manage their portfolios better by focusing on disciplined asset allocation, diversification and periodic rebalancing. Even in crisis periods, history has shown that investors have benefited from staying invested and markets have rewarded investors willing to ride out the volatility. The good news is that markets are remarkably resilient! It has repeatedly recovered from short-term crisis events to move forward over a period of time. As the Indian growth story continues its march forward, turbulence will be an inherent part of investing, but if you commit to the long term it will always be a good time to invest in equity and equity mutual funds.
By Shalini Sekhri
(The writer is chief business officer of Indiabulls AMC)