Some people are afraid of the stock market - it's a gambling den, they say. Stocks move for no reason, and sometimes, they do not move even when there are good reasons for them to. In certain cases, news seems "manufactured" to make the stock look attractive, just before it crashes. Certain companies only advertise on channels such as CNBC-TV18, just so they will be noticed by traders who might buy their stock and make it go up.
While it is true that some stocks are manipulated, the amount of manipulation you perceive is directly proportional to the amount of money you have lost in the market. It is illogical to presume that broad markets are rigged against you if it has given you a compounded return of 12 per cent in the last 18 years; if anything, it has been rigged in your favour.
We've never let some of our largest entities go down, even if they were scam-tainted. Apart from small co-operative banks, none of our large banks have in any way hurt depositors or debtors even when they were in a crisis (in the last 15 years). We've even mounted shareholder rescues - like when a scam-tainted Satyam was given temporary support while Mahindra emerged winners in the auction to eventually take the company over. Nothing's wrong with this - only, if this had happened to a smaller company, chances are the shareholders would have got nothing. Still, the "too-big-to-fail" concept should have made us want to invest in equity.
For the last few years, our government even rewarded stock market investing by charging no capital gains taxes on market investments held even for one year. Transaction costs at the NSE are among the lowest in the world.
And then consider this: The NSE Nifty has returned about 11 per cent since 2000, moving from 1500 to about 5000. A monthly investment of Rs 5000 in the Nifty, with 1 per cent transaction costs, would still give you a return of 16.54 per cent per year, compounded - your investment of Rs. 6.3 lakhs in total would have grown to 16.45 lakhs. This after two vicious falls, dramatic market circuit breaks and two governments -- a corresponding fixed deposit would have yielded far lower.
Yet, in a broad way our retail investors seem to care less and less about direct stock market investments. There are 1.68 crore demat accounts in the country, between CDSL and NSDL, the two large depositories. A number of these are duplicate - I, for instance, own three - and many of them are corporate or institutional. I would estimate the actual number of direct retail investors in the markets is probably 80 lakh or so.
We have about 8 crore - 80 million - households in the middle class; which means about 10 per cent of households on average have a demat account and thus, an investment in stocks.
Okay, so perhaps we invest through mutual funds. Most western research says that indexing is a better option; that mutual funds, with their costs, do worse on average than the index. In India that is hardly true; the best performing mutual funds of 2000 (Alliance Tax Relief, Alliance Equity, SBI Magnum Taxgain, of which the former two have been acquired by Birla Sunlife) have beaten the index in the last five years by 2 to 3 per cent per year compounded. Shouldn't mutual funds then be a hugely attractive option? (Data: Value Research Online)
Even there, we seem to have just 4.8 crore folios; and most investors have multiple folios. (Each investment house will count the investor separately, and sometimes people like me invest in the same fund house with different folios). The industry norm is take 5 folios per investor - that means we have about 1 crore investors, and since most of them will overlap with the demat accounts, and include corporate investors, we are probably speaking of an investor base of 1 to 1.5 crore in the country - that is, less than 20 per cent of all households.
We do invest, indirectly, through pension funds and insurance companies. But large fund captives are hardly useful - your money is locked so you can't protest by pulling out. Recent government IPOs were bailed out by a certain government-owned life insurance company, despite there being very little retail interest - it is, in the end, retail investors' money; money they have no control over.
All this is good. Perhaps we as a society need to invest more in the equity markets, either directly or through mutual funds. But why should I, you ask. The answer is -- there's not too much of a choice, is there? There are some fixed deposits or bonds available, which is good for sub-10 per cent income. But in a growing economy, bonds and fixed income will be matched by inflation - and to beat inflation, you have to participate in the long term in equity in some way. Or, in other words, take some risk to get a higher return.
This isn't meant for people who can't afford the risk. If you have serious amounts of debt, or are a retiree that needs only fixed income, keep away! But to a good number of us, there's either longer-term money we need to stash away for retirement or children, or there's a "surplus" - excess money left over after investing what's necessary in risk-free avenues.
It would be arrogant of me to advise you about what to do, so I won't. Let me talk instead of my own long-term investing.
What I do for my son's education investments - which I know can be a huge amount as he grows up - is to invest a certain amount every month, in the equities and commodities. So I buy stocks, and I buy a gold exchange-traded fund. I do about three or four days of research per investment - which essentially boils down to: it has a good track record, I don't think management is fraudulent and the shares aren't overvalued. Sometimes I don't bother; I just re-buy the same stocks I did the earlier month.
I really don't care about beating the indices; I just want an average return of 12% a year. And in the last four years, I have been lucky enough to get just that. If I get less return than expected, I put in more money that month, and less if I've already reached my goal. The last one year has been extremely kind -- I have only invested in three months!
A similar method exists for retirement planning. What I would never do is invest "short term" money - six months of expenses and then a capital buffer I keep for emergencies - in stocks. In other words, no risk where it is not required.
I do manage my long term investments, moving from one kind of investment to another about once a year. This might sound like a lot of work to some people - I know that stocks and markets can be very boring, but then so are tax returns, and we do those once a year. At least this money will come back.
Finally, a word of caution: Between 1966 and 1982, the US markets - the Dow Index - started at 1,000 and ended at 1,000. That was a 16-year period of effective nothingness. In the last 10 years, too, the US markets seem to have gone nowhere - their markets are around where they were 10 years ago. All my hoopla makes sense in a market that has grown well, but does it stop here? Will our decade of nothingness be the next one?
There is no way to predict it either way. But like Google and Apple have done very well in the lost decade of the US, there will be stocks that will do well even if broad markets don't. It is up to us to recognize those stocks and ride the wave.