Invest now for a 3- 5 year goal.
Giridhar Rao sold most of his investment in equity mutual funds close to his buy price in the recent market rally. Savvy investors may call it a herd mentality, but he knows the pain of holding his investments for five years. There is no right or wrong in his behavior. Investors not following goal-based investments and fixing a return target for the investments will naturally react this way. Retail investors behave in a contrarian manner when it comes to equity investments. In normal parlance individuals buy when it’s cheaper and reduce the consumption when the prices are higher. Examples are plenty right from onion to gold.
Investors comes to equity market only to beat inflation and earn extra return for the risk assumed. But over a five-year period, the compounded annualized return of the BSE Sensex is 3 per cent and if it is inflation-adjusted, the real return is negative.
If the returns are so poor, does it make sense to invest in the equity market? Historically, investments made in bad times and at low price-to-earnings (market share divided by the earnings per share) can be good investments.
Investments made when the markets are at less than 15 PE, delivered over a five-year period more than 25 per cent. But the strange thing is that investors invest less money when the markets are low, but when the markets are close to their peak they pump in money—savvy investors use this to exit.
In 2005, when the PE was 12, net inflows into mutual funds was Rs 7,400 crore, but in 2008 when the indices where close to their peak, net inflows were Rs 52,000 crore. Since then, in the past five years, net inflows into mutual funds were less than Rs 1,500 crore. It clearly shows that investors are not buying when it is cheap. On the contrary, they buy when the prices are exorbitant.
Hence, investors with a goal of 3-5 years and expecting a 15 per cent return from equity investment should now consider investing in a staggered manner over the next 3-5 months to reap a good harvest. For those already invested and sitting with a marginal return, it’s better to hold the investments, provided their goals are 3-5 years away.
But if you are a speculator and wish to make a quick buck, follow the election year return in equity markets for short term investments for 6-8 months.
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