Investing in the Indian growth story

Equity markets are on a structural uptrend, thanks to reforms initiated by the govt

The common man is at the crossroads today. Where should he/she invest? Real estate returns are on paper. Gold has remained subdued over the last seven years and more. Debt Instruments are giving mid-single digit return, post tax. Equity markets have run up sharply and valuation looks high.

Global as well as local factors, such as the West Asian situation, protectionism, Brexit, GST roll-out, slower job creation, tepid earnings growth, revival of investment, etc., deter investors from entering the equity market.

What should an investor do in the current scenario? To begin with, an investor must have a financial plan. “I want to be rich” is not a financial plan, neither is “I want to earn maximum return on my investment.” One needs to set goals and plan savings accordingly. To draw a proper financial plan, one needs an advisor. A good advisor will balance short-term spending with long-term saving, risk vs return and expectations vs reality. Many savers, in the absence of a proper financial plan, don’t realise the full potential of their investments.

Markets will be volatile. Be it gold, real estate, debt or equity, there will be a cyclical up or down swing. If you want safety, returns won’t be adequate. If you want higher return, risk too will ride along. Take a disciplined approach to ignore cyclicality and ride the structural trend. This discipline comes through asset allocation. “Don’t put all your eggs in one basket” applies to investment too.

Invest and wait

Currently, equity markets are at the higher end of fair value and will have cyclical swings in the days to come. However, they are on a structural uptrend due to the reforms initiated by the government and the good work done by India Inc.

In such a market, if an investor is under-invested in equities, then he/she should go for a systematic transfer plan (STP) in equity funds. Whatever one wants to invest, one must divide it into 10-20 instalments and start investing in the market at regular intervals covering 6-12 months.

If there is a correction in the market, then one can advance investments to enter at a lower level. If one is neutrally invested in equities, then one can continue with systematic investment plan (SIP) on a monthly basis. SIP is a simple and effective tool. It disciplines an investor through the cyclical swings of the market and helps ride the structural wave. If one is over-invested in equities, then it is time to remove leverage and take some profit home. After making investments, it is important to give the investments sufficient time to bear fruit. Generally, investors focus on timing the market to make quick money. What they don’t see is that it is one’s time in the investment that makes money for the investor.

Patience pays

Sachin Tendulkar accumulated maximum runs in test cricket by staying on the pitch as long as possible and facing as many deliveries as possible. He didn’t try to hit every ball for a four or six and score maximum runs. If a player of Tendulkar’s calibre had to stay on the pitch to score runs, the common man has to spend time in the market to make money.

India started economic reforms in the early 90s. India’s GDP and market cap was under $300 billion at that time. Today, India’s GDP is about $2.2 trillion and market cap is about $1.95 trillion. Over the last 27 years, GDP and market cap have multiplied about 7 times in dollar terms while the Sensex has multiplied more than 39 times.

On a longer term basis there is a high co-relation between size of growing GDP and market cap. It is estimated that India will become the third largest economy in the world over a period of time, crossing $10 trillion in GDP. If the economy expands, markets will also go up.

It is not unreasonable to estimate that, over the next 5 to 7 years, the economy will expand by more than what it is today. That expansion will lead to many companies creating wealth like in the last 27 years. It is an opportunity for investors to participate in that growth journey. Asset allocation and long-term investment will help investors to take part in the action like more than 1.25 crore Indians who are doing their SIP with mutual funds.

The writer is MD, Kotak Mahindra Asset Management

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