By all accounts, Indian investors don’t have much exposure to the stock market – and they must own more equity. Against the backdrop of a growing economy for the past 35 years, the stock market - as measured by the BSE-30 Index (Sensex) - has given returns that have outpaced inflation.
If the Indian economy continues to grow at a rate of 6.3% per annum using the old data series (which is the average annual growth rate achieved over the past 33 years across 10 governments) chances are the stock markets will again generate returns that are above the rate of inflation.
This means that money saved and invested in the stock market is likely to be a net contributor to your future wealth.
Of course, there are a range of ‘ifs’ and ‘buts’ for this to happen. The biggest risk, though, is the ‘Buyer Beware’ sign that millions of investors have ignored by blindly trusting the providers of financial services. Tragic investment products sold by a financial services industry that seems to be more focused on counting its revenues from commissions and fees than on serving its customers has wiped out a generation of investors.
Stock markets are influenced by fear and greed, and economic data. Investors must be made aware that stock markets are risky: and mutual funds that invest in stocks are equally risky. The SEBI disclaimers are not the end of the responsibility of financial education, but the preamble to a long discourse which needs to hammer in that an investment in shares is not a fixed deposit from a PSU bank where there is a contractual, known, and fixed rate of return.
Nor should an investment in shares be a focus of short-term profits: only a few who follow the market closely should think of subscribing to trading services and watching the financial news channels like mummified zombies. Share price movements can result in good times when returns will astonish – but be prepared for bad times when there will be large losses. A well-worn adage is that investors are not expected to “time” markets. Neither are Independent Financial Advisors, or IFAs, supposed to ‘time’ their recommendations.
Timing and navigating
There is a fine line between ‘timing’ and ‘navigating’. Take the recent surge of retail buying that kicked off after the Modi Magic enthralled 32% of those who voted in the May 2014 general elections and brought the BJP to victory. Stock markets, recovering from their September 2013 lows, continued to surge. Foreign Portfolio Investors – charmed by Modi’s Magic Wand and fearful of the other large emerging economies - piled up on Indian stocks.
In such an environment one would expect the CEOs of India’s self-centred mutual fund industry to launch closed-end funds, lock in client money, find innovative ways to pay distribution channels and look to their boards for higher bonuses. True to form, that is exactly what happened. A series of new funds, new promotions, and a blast of optimism dominated the Indian financial landscape: investors have been lured back into equity mutual funds in record amounts.
But, what did the IFAs do during this period of irrational exuberance?
An IFA is supposed to be commission-neutral and focused on the long term wealth of their investors. In this raging bull market did the IFAs:
1) Urge clients to invest in equity mutual funds, knowing that clients are underweight?
2) Convince clients to plan SIPs because this entails a long, secure stream of inflows and, therefore, commissions – or encouraged SIPs because that is a sensible way to dribble in to the stock market: buy over 3 to 5 years and reap over 30 to 50 years?
The reaction of the clients to the recent decline in share prices will reveal part of the truth. If clients were navigated into equity mutual funds with the full awareness that prices may head down, then the IFAs have done a great job and their clients won’t panic.
If the clients were told to jump into equity mutual funds because the market is going up, then that story will unravel as the market continues to turn south. Investors will, once more, be the fodder and will be blamed for the irresponsible actions of the marketing machines of mutual fund houses and the financial intermediaries in the food chain.
Historical data of local and foreign flows indicates that we may be in for tough times.
In the days of the BRIC madness and India Roaring (2005 to 2008), there were four months where local investors poured over $1 billion net into equity mutual funds (inflows minus redemptions). The outcome of that Faith In India, when measured over a 1-year and 2-year return, was 50/50: in two of the four instances, it was a good decision and the local investors made a profit.
Since the Modi-fied India story, there have been six instances of local investors rushing to buy over $1 billion in equity mutual funds. Given that we are measuring 12 data points in total (a 1-year later number and a 2-years later number), we only have known data for 2 prior investment periods: and both are negative.
(See Table)
If investors get frightened and begin to believe that +7% in a fixed deposit is far better than a -10% in an equity mutual fund and cancel SIPs, then we will know that the army of sales people employed by the top-line driven CEOs of mutual funds have done yet another dis-service to their customers. That is to be expected.
The real question is: what advice did you, as an IFA, impart to your client?
Poor judgements can always be pardoned as they are un-intentional: markets take any opportunity to humble the most seasoned fund manager or make the IFA look silly! But, if the IFAs herded them into equity mutual funds because of the commission structures and incentives, then you did not ‘navigate’ your clients through turbulent times. Investors don’t need advisers, they need a guardian.
The above article is written by the author in his personal capacity and may not reflect the views of the organization he represents.
