Equity Investing for the Long-Term - It Pays to Play the Waiting Game
The Indian equity markets are trading at record highs, with the S&P BSE Sensex crossed the 51,000 mark intraday on February 5, 2021 and closed at 51,349 on February 8 2021. The market has rallied sharply after growth focused and high spending Union Budget on February 1, 2021 and hopes of global economic revival amid prospect of massive US stimulus package and vaccine rollout.
Soaring valuations have left investors in a dilemma - should they book their profits and exit, or bet on a continuation of the rally in stock prices? We believe that patience is a virtue when it comes to the stock markets, and prudent long-term investing, preferably via
systematic investment plans (SIPs), is the way to go.
Short-term volatility versus long-term upward trend
The last one year has been extremely volatile for the equity markets, with the S&P BSE Sensex spiralling down around 37% in March 2020 due to fears regarding the Covid-19 pandemic and the ensuing lockdown, before recording a sharp recovery to gain 97% to trend near the 51k mark in February 2021. The gains were primarily driven by led FPI liquidity, and optimism regarding an economic recovery amidst the Covid-19 vaccine rollout.
The last one year is depicted in Specimen 1.
Source: BSE, CRISIL Research
Specimen 2 below depicts the long-term trend of the market benchmark S&P BSE Sensex which clocked 13% CAGR returns from January 2001 till January 2021. Despite periods of market volatility in 2008, 2011, 2017 and 2020, the long-term trend has been positive.
Source: BSE, CRISIL Research
Notes: 2021 data till Feb 8, 202
Investing for the long term lets one benefit from this positive uptrend, while reducing risks associated with the market. As seen in the chart below, the S&P BSE Sensex has returned an average 21% for a one year daily rolling return period, since its inception in June 1979 till January 2021. This, however, is the average and includes periods when investors have suffered losses, with a loss probability (count of negative returns / total number of returns) as high as 28% in this short holding period. However, as the investment period increases, returns stabilise, with a sharp reduction in the probability of loss (there was no loss in a holding period of 12-15 year on a daily rolling basis). In addition, the volatility represented by standard deviation reduced drastically from 35% in the one year period to 4% in the 15-year period.
The importance of long-term systematic investments
Like conventional instruments, investor may invest small sums regularly in mutual funds schemes via SIPs. Investors can pre-define the frequency and the amount invested, depending on their goals and investment horizons. These small but consistent investments over the long term could help anyone achieve his/her financial goals with little impact to their current standard of living.
Some key benefits of SIPs are:
However, to optimise returns via SIPs, it is essential to not panic and stop investing when the markets fall. The following case study demonstrates this.
Mr A and Mr B both started monthly SIPs of Rs 10,000 each in an
equity fund* from September 2013. But when the markets slumped between August 2015 and March 2016, Mr B redeemed his investments, even as Mr A continued till December 2020.
Consequently, a subsequent jump in the markets helped Mr A garner Rs 11.15 lakh more from additional investments of Rs 5,80,000 (Rs 10,000 x 58 months) after Mr B exited his investments at a loss. (See chart below)
Source: BSE and CRISIL Research
* S&P BSE Sensex Index rebased to 10
The above calculations are for illustration purposes only
Some points to consider
While equity investing is long term, apart from financial exigencies, investors can consider redemption or readjustments in case investment don’t perform as expected or throw off their overall asset allocation plans, as demonstrated in the case study below.
Let us assume that in the beginning of 2020 an investor invested 50% each in equity and debt. By March 2020, the allocation weightages changed to 39% equity and 61% debt, given a sharp fall in equity. This calls for a rebalancing of the portfolio or withdrawing from debt and investing in equity so the ratio becomes 50:50. Given the sharp uptrend in the market afterwards, by December 2020, the investor allocation to equity jumps to 63% and 37% in debt. As the investor is now overweight in equity, it calls for additional rebalancing to maintain the original target of 50:50.
The table below illustrates the case:
Portfolio rebalancing in 2020
Source: CRISIL Research, BSE
Equity returns is represented by returns of S&P BSE Sensex
Debt returns is represented by returns of CRISIL Composite Bond Fund Index
Note, portfolio rebalancing calls for analysis of the exit load and other costs and tax impact. So evaluate before those before taking decisions.
Focus on long term investing and not market levels
To sum things up, optimising equity returns is about patience and consistency in investments and not short-term timing of the markets. Matching one’s equity investments to one’s long-term goals and making regular investments via SIPs can be a winning approach in the long term.
Disclaimer:Any comparison/data mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns.Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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