Investors can benefit from the India growth story and the trend towards index investing in a systematic manner looks encouraging
INVESTORS have been worrying about the uncertain market scenario of the past one week. The question is whether we once again are nearing to a bubble stage. Personally, I have one core belief: neither pundits nor laymen have ever been able to predict market movements correctly in the short term, though like the weatherman, we keep trying.
In my opinion, the best form of investing is to buy an index fund when you have money, and redeem it only when you require it really badly: or "like your grandmother bought gold" approach to investing. Is the Indian equity market really valuable at the current levels? Well, let's consider a few facts.
In the short term, the stock markets move more on account of liquidity than fundamentals. It appears as though Indian markets will continue to attract international liquidity because India is not seen as overvalued internationally. The CNX Nifty is trading at 18x FY12 earnings, a shade below its all time high of 21x. But more interestingly, compare this with other indices. Nikkei is at 17x one year forward, and Japan is growing at 0.4% to our 8% or thereabouts.
The Coal India issue has showed the appetite of investors for Indian IPO/FPOs and there is a pipeline of them in the offing such as PGCIL, ONGC, SAIL, IOC, PFC etc.
In dollar terms, we have reduced returns year on year. The dollar returns for an FII were 20% year-on-year as compared to 27% absolute returns. Thus the market is not really very expensive for a foreign investor than it was a year ago. Of course, if the dollar appreciates dramatically, the investor would not benefit, but while it remains flat or goes downwards, as it should when compared to a rapidly growing economy like India, he can benefit substantially.
There is no let up in the liquidity infusion worldwide and much of this liquidity will be chasing assets, such as commodities and, of course, stocks in growth economies.
An interesting facet of this run up has been the limited participation of retail investors. Mutual funds have not seen strong inflows as they showed in 2006-2007 and retail volumes on the exchange have also been low.
The apparent cautious approach of retail investors is partly because of the unprecedented volatility that they saw in 2008, but this is not the full story. In the past few years, the systematic investment plan has really come to occupy a significant place in investors' minds and the steady increase in the number of SIPs is witness to this. While SIP does not make for large numbers immediately, they augur well for future stability and this is heartening.
There are two developing trends that are going to transform equity investing in India in the years to come – systematic investing and index funds.
In the past, one of the problems with booms has been the proliferation of expert fund managers, who look very good as the market soars but rarely if ever, recover their past glory after a bust. This has made investors really cautious of betting big money behind the latest "Big Bull" or "Star".
They have also seen that their SIPs often lose much less value than their lump-sum investments made during a boom. The answer to the problem is not to pick fund managers and the only way to do it is to invest in index funds.
These funds cost less, and their NAV moves with the market; without holding cash, these funds avoid second-guessing the market and failing; they do not depend on the ability of anyone to pick stocks since they just replicate the index; and above all, you can be confident that your SIP will not be stuck in a fund with lots of bad decisions which will never recover.
Over time, I hope that Indian investors can benefit from the India growth story as much as FIIs have and the trend towards index investing in a systematic manner makes me confident.
