There is always a quest to get the timing right. You want to enter the stock market when it is the right time. It is somewhat like cricket. If you are a batter, you can punch the ball with good timing to hit the fence like a rocket. If you do not have a sense of good timing, then you have to work hard for your runs. The same philosophy applies to investing. We must underscore that we are not talking about short-term investing or trading. The idea is to encourage you to invest regularly and stay invested as long as possible.
If you look at the data from the Association of Mutual Funds in India, there are encouraging signs of retail investor participation in equity assets. That means more of you are investing regularly through systematic investment plans than ever. Over a third of your savings contribute to the monthly net addition of equity assets. A lot of you are investing in actively managed equity funds. These diversified equity funds give an average return of 15-18% each year. Mutual funds encourage you to put your savings into them as long as they generate steady returns over the long term that works for you.
The contribution to index funds in the overall equity assets of mutual funds is at 13% of the net inflows, according to one statistic put out by HDFC Mutual Fund in the conference call with analysts after the June 2023 quarter results. That means many of you are trying to maximise returns and not allocating savings to passive funds. An index fund is a passive fund that generates a return aligned with a benchmark index like the S&P BSE Sensex or NSE Nifty. The average return from such a fund should align with the 11-12% annual return these indices generate. The difference between active and passive funds is the fund management fee. If you take out 2% (it could be more), the average return from a diversified equity fund is 13-16%, not too far from the index fund.
For those new to the investing world, index funds make a good first step. You could opt for more diversified equity funds later as your income grows. Salaried American households became wealthy in the 80s and 90s by allocating a substantial amount of their savings to index investing. There is no reason why you should not do so.
America witnessed an unprecedented stock market boom in the 80s and 90s when companies generated strong profit growth. Over the past two years, the two benchmark indices in India have not moved up significantly. At the same time, corporate profits have grown. The average price-earnings multiple of the two benchmark indices is lower than the previous peak two years ago. That is a significant indicator that the timing is right to take that first step and start investing. Share prices are all about profits and relative valuation.
The price-earnings multiple is the number of times a company’s share price trades to the earnings per share (EPS). Today’s prices are not about historical profits. They are about tomorrow’s profits. If you are confident that Indian companies will continue to post strong profit growth, it is time for you to benefit from their growth.
Experts predicted in the past that India could become a $26 trillion economy by 2047 when it turns 100 as an independent republic. That is a significant jump from the present $3.5 trillion. For that to happen, Indian businesses must turn productive and contribute. Manufacturing and services sectors must expand their business and grow with profits. If that is the path, you are in a good position as an investor. You must remember that picture of the next 24 years and start now. You will get the timing of your shot right as you practice. The only way to do that is through systematic investing.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)