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Why Must Everyone Invest Now?

By Author: V.V.K. Prasad
Total Articles: 11

Why? When? And how long?
The general mood among investors in India at this point of time can be described as depression. Having seen the index fall by more than 20% from its peak of 9119 recorded on 4 March 2015, conditions of gloom prevailed all across the stock markets. While a few analysts are coming out with buy recommendations, we also have a set of analysts predicting a further precipitation confusing retail investors on what their actions should be.
A study has been conducted by Vivekam to learn from the past experience to determine whether it is desirable to begin investing at this point of time or wait for some time hoping the markets would correct further and offer bargain prices. Before we discuss the findings of our study, a few lines about what an investor normally focuses may be apt.

Stock markets being variable return investments, he cannot control RETURNS. However, we seldom come across investor who focuses on controlling the controllable factors, and instead sets eyes only on returns, which are not in his control. Our study has been able to establish a fact that by playing with time factor, 99% times investors were able to turn the returns into their favor.
Going by the textbook definition of 20% correction from the peak is equal to recession; we tried to spot such instances where nifty index has cracked by more than 20% from its peak in the last 13 years. Following the footsteps of Warren Buffett, who suggests buying amidst fear situation and sell amidst greed situation, we assumed our investors to be brave hearts to buy when there is fear in the market post 20% correction in the index. Most of the stocks, including well performing stocks, are available cheap when the fear pervades market.
Instead of attempting to focus on individual stocks, we carried our study assuming that investors would be happy buying nifty index on all days where the current levels are at least 20% lower than the peak. In the last 13 years spanning from 2003 January and up to 19 February 2016, there were 929 opportune days when the index was trading below its latest peak by 20%. The returns offered by index in the next 2 year period, 3 year period and 5 year period are very interesting to dig deeper. Looking at the table below, one would understand that the average profits earned by the brave hearts stood at 53%, 74% and 138% over 2, 3 and 5 years.
NIFTY Statistics From 2003

Market Correction : 20%
Date : 2003- Present Nifty (Avg % gain ) Nifty Loss Instances
No of Instances 2 Yrs 3 Yrs 5 Yrs 2 Yrs 3 Yrs 5 Yrs
929 53% 74% 138% 39 26 1

Market had offered 929 opportunities of BUY (being more than 20% less from its peak) in the period 2003 to 2016 January. By paying close attention to the data analyzed, we realized that in some instances there could be losses in nifty even after holding for 2, 3 or 5 years. There were 39 such instances where investors could have lost by holding onto the nifty for 2 years. For 3 year period the chances were reduced to 26. When investors hold the index for 5 year period, only once there was a loss. This implies that the chance of investors losing by being flexible in their time horizon is very remote. We also checked for any day, which should have left the investor in losses even if he held the Nifty for 2, 3 or 5 years. We could not find a single such instance. This implies that every investor would have gotten an opportunity to book profits in at least one of these periods, irrespective of when he started.
To counter the argument of skeptics, we narrowed down our analysis to period starting from 2008 running all the way upto 2016 January. This period has witnessed two big time bear phases and a modest recovery. In this period, average return enjoyed by investors by holding on to his positions, after buying when the market corrected by 20% from its peak, over 2, 3 and 5 years stood at 35%, 41% and 56% respectively. Since equity investments held beyond 1 year are exempt from capital gains tax, this could have been the net return to investors. Yearly returns worked out to be 17.5% p.a for 2 years holding, 13.67% p.a for 3 years holding and 11.2% for 5 years holding, which is far higher than the current 7 – 8% p.a offered by banks.
NIFTY Statistics From 2008

Date : 2008- Present Market Correction : 20%
Nifty (Avg % gain ) Annual (return %)
2 Yrs 3 Yrs 5 Yrs 2 Yrs 3 Yrs 5 Yrs
35% 41% 56% 17.5% 13.7% 11.2%

From the above tables we can infer that the returns offered in a bull market are several times more than fixed deposits with least effort on spotting the bright stocks. Several mutual funds have started schemes based on Indices like Nifty and Sensex. These are called Exchange Traded Funds and their NAVs closely track the movements of Nifty in real market. By allowing investments of even small amounts upto Rs 1,000 per month, investors can now start Systematic Investment Plan (SIP) with an eye on future.
Since SIPs are now possible in Nifty index, we explored the data to find how those monthly systematic investments could have fared for retail clients in the period post 2008. Average gain seen in SIP portfolios in SIP, when the Index is trading 20% below its peak, stood at a compounded annual growth rate(CAGR) of 13.5% if invested for two years, 9.51% for three years and 10.41% for five years. This means a monthly investment of Rs 10,000 in Nifty would have returned 2.75 lacs in two years, 4.16 lacs in three years and 7.82 lacs in five years. Since profits are tax free being long term in nature, investors would have stood to gain a lot.
Other options to further improve returns on investments are Equity schemes of Mutual funds or PMS schemes offered by brokerates or Investment products from Vivekam. We also compiled the data of performance of our BIO Growth product and SMILES product for the same period under review. The returns earned prior to year 2008 were too high and are difficult to achieve in the immediate future. To be more realistic, we present the comparative performance of BIO Growth and SMILES Growth for 2,3 and 5 year periods.
BIO Growth result From 2008

Date : 2008- Present Market Correction : 20%
BIO Growth (Avg % gain ) Annual (return %)
2 Yrs 3 Yrs 5 Yrs 2 Yrs 3 Yrs 5 Yrs
70% 110% 229% 35% 36.6% 45.8%

SMILES Growth from Vivekam is like SIP in mutual funds and hence we collected the data on performance of SMILES portfolios as well for the same period and they are as follows. Though there was a steep correction in 2008 and again in second half of 2015 followed by early 2016, investments in SMILES for 5 years never earned negative returns. Markets do not offer such excellent opportunities to begin investing often. When the data is so supportive of superior returns, one should start immediately, if not done already. Vivekam strongly believes that investments made at this time will yield highly positive returns in next few years.
SMILES Growth From 2008

Date : 2008- Present Market Correction : 20%
Compounded Annual Growth Rate(CAGR %)
2 Yrs 3 Yrs 5 Yrs
26.84% 24.95% 25.44%

If any investor, in his / her own wisdom opts to go with mutual funds, Vivekam can help them find the right fund based on their investment horizon. Encourage all your friends and relatives to invest in markets in one route or other to benefit in the next few years. They will thank you for the advise in future. Feel free to write to us for any further clarifications.

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