Equity mutual funds

Buys High and Not Low: That’s the Indian Investor for You

bullfighting

“Buy Low, Sell High,” goes the old stock market wisdom.

But like most stock market wisdom, this is easy to mouth, but difficult to implement in real life. It is very difficult to buy when others are selling and vice versa.

The tendency is to go with the herd because there is safety in numbers. And if things don’t work out as intended, one has someone else to blame as well. “I only did what Mr Singh’s son recommended,” goes the argument.

The question is how do numbers look on this front? Do investors actually buy when market levels are low and sell when market levels are high. Or are they doing exactly the opposite?

Take a look the following chart. That is how the Sensex has looked between April 1, 2011 and March 31, 2016. As can be seen from the chart, the overall trend of the Sensex has been in the upward direction, though it did fall during the course of 2015-2016.

 

Now take a look at the following table.

YearShares and Debentures
(as a % of GNDI)
2011-20120.2
2012-20130.2
2013-20140.4
2014-20150.4
2015-20160.7

Source: Annual Report of the Reserve Bank of India

The table shows the portion of gross national disposable income (basically the GDP number adjusted for a few other things. For a detailed treatment click here) made up for by investments in shares and debentures, which are a part of the household financial savings. In 2011-2012, shares and debentures made up for 0.2 per cent of the gross national disposable income. By 2015-2016, this had jumped up to 0.7 per cent. The household financial savings comprise of currency, deposits, shares and debentures, insurance funds, pension and provident funds and something referred to as claims on government. The claims on government largely reflects of investments made in post office small savings schemes.

What the table clearly tells us very clearly is that a very small portion of Indian retail investors invests in shares and debentures. In fact, these numbers also include the mutual fund numbers.

What do we learn from the chart and the table? As the Sensex went up, so did the investments in shares and debentures.

The trouble is that for some reason, which actually makes no sense, the RBI puts out the data for shares and debentures together. A breakdown of the total amount of money held in the form of shares (or debentures for that matter) is not available. But with the help of some other data we can prove that the Indian investor basically follows the policy of buying once the stock markets have rallied.

As on March 31, 2011, the total amount of money held in equity mutual funds in India had stood at Rs 1,69,754 crore. By March 31, 2016, this number had stood at Rs 3,44,707 crore. The assets under management increase in two ways. The first is because the value of the shares held by the mutual funds goes up. And the second is because of the fresh money being invested into the mutual funds.

As we can see the assets under management have more than doubled in the five-year period. On the other hand, the Sensex returns during the period stood at 30.5 per cent. Hence, it is safe to say that the major part of the increase in assets under management was because of new money coming into the mutual fund schemes.

And this new money kept coming in as the Sensex kept going up. Take the case of what happened between March 31, 2015 and March 31, 2016. The Sensex fell by 9.3 per cent during the course of the year. The assets under management of equity mutual funds on the other hand, went up by 12.8 per cent.

In fact, during the period, the Sensex achieved its highest level on January 29, 2015, when it closed at 29,681.77 points. Between then and March 31, 2016, the Sensex fell by 14.6 per cent. At the same time, the assets under management of equity mutual funds went up by 14 per cent.

This is a clear indication of the fact that investors actually invest in equity mutual funds only after the markets have rallied. Once the market has rallied, the investors probably assume that it will continue to rally.

Hence, I guess, it is safe to say that a similar behaviour is on when it comes to direct investing in stocks as well. And that (along with increase in mutual fund investments) explains why the share of shares and debentures has increased from 0.2 per cent of gross national disposable income in 2011-2012 to 0.7 per cent in 2015-2016.

Of course, one would be able to say this with much greater confidence if the RBI gave an exact breakdown of shares and debentures. I hope that this anomaly is corrected in the days to come.

The column originally appeared in The Five Minute Wrapup on September 7, 2016

The sucker flag is up, as the retail investor is back into the stock market

Vivek Kaul

It’s morally wrong to allow a sucker to keep his money – W C Fields

The Indian retail investor is a sucker. He invests when the markets are high and he gets out when the markets are low. Don’t believe me? Look at the table that follows.
This table shows the net inflows(total inflows minus total outflows) into equity mutual funds in India during the course of a financial year. As can be seen in 2007-2008 equity mutual funds saw a net inflow of Rs 40,782 crore. This was the time when the stock market was on fire. In early January 2008, the Sensex almost touched 21,000 points. It had started the financial year at around 12,500 points.

earInflows/Outflows in/from
equity mutual funds (in Rs Crore)
2007-200840,782
2008-20091,056
2009-2010595
2010-2011-13,405
2011-2012264
2012-2013-12,931
2013-2014-7,627
2014-2015 (from April 1,2014 to October 31 2014)39,217

Source :Association of Mutual Funds in India


And when the party was on the retail investor couldn’t have been far behind. He poured money into equity mutual funds. In January 2008, equity mutual funds saw a net inflow of Rs 12,717 crore. The stock market started to fall from mid January onwards. In fact, the Sensex fell from 21,000 points to 17,500 points in a matter of a few days.
So, the good things came to an end pretty soon. Over the next few years, the faith of the retail investor in the stock market came down dramatically and inflows into equity mutual funds almost dried down. In 2010-2011, the outflows from equity mutual funds reached Rs 13,405 crore. The trend continued in 2012-2013 and 2013-2014 as well.
What these data points clearly show us is that the retail investor poured money into the stock market at high levels and got out only once the market started to fall. The opposite of the buy low, sell high, strategy that the stock market experts keep talking about. But what else do you expect from a sucker.
Nevertheless, things seem to have started to change again. The retail investor seems to be back into the stock market. This financial year (between April and October 2014) has seen a net inflow of Rs 39,217 crore into equity mutual funds. And if things go on as they currently are, the year might see the highest inflow into equity mutual funds ever.
This is not surprising given that the Sensex has rallied by close to 25% between April and October 2014 to reach almost 28,000 points. And this has got the suckers interested in the stock market all over again.
In fact, the Indian retail investor isn’t the only sucker going around. Maggie Mahar in her book Bull!—A History of the Boom and Bust, 1982–2004, makes a similar point about American investors during the dotcom bubble.
Between 1982 and 1996, the Dow Jones Industrial Average gave positive returns in 12 out of the 14 years. In eight of the 12 years that the Dow had given positive returns, the absolute return had been 20 percent or more. This led to more investors entering the stock market.
The number of investors in the stock market increased, as many middle class investors made their first jump into the stock market. Wealthier Americans already owned stocks. Nearly three-fourths of those having financial assets of $500,000 or more had made their first investment in stocks sometime before 1990. Some 33 percent of the households with financial assets of $25,000 to $100,000 bought their first stock or invested in a mutual fund that in turn invested in stocks between 1990 and 1995. But 40 percent of those owning financial assets in the range of $25,000 to $99,000, and 68 percent of those with financial assets of less than $25,000 made their first purchase after January 1996.
So, the American retail investor started taking interest in technology stocks only after January 1996, and by that time the dotcom bubble was well and truly on. A similar sort of dynamic was visible in the real estate bubble that followed, when a large number of individuals started taking loans to buy homes that they wanted to flip, only by 2005-2006, when the bubble was at its peak.
Economic theory tells us that more often than not, higher prices dampen demand and lower prices increase demand. But when the stock market witnesses a bull run, investors do not behave like normal consumers.
As Mahar puts it in Bull! “In the normal course of things, higher prices dampen desire. When lamb becomes too dear, consumers eat chicken; when the price of gasoline soars, people take fewer vacations. Conversely, lower prices usually whet our interest: color TVs, VCRs, and cell phones became more popular as they became more affordable. But when a stock market soars, investors do not behave like consumers. They are consumed by stocks. Equities seem to appeal to the perversity of human desire. The more costly the prize, the greater the allure.”
This is something that every investor should try and remember.
What these examples show is that the retail investor tends to enter a market only once its done well for a while. In the process he or she ends up making losses or limited gains.
Let’s compare this to a situation of an investor who had invested regularly in the stock market over the years, through a systematic investment plan.
Let’s consider the Goldman Sachs Nifty BeES fund for this exercise. This particular fund is essentially an exchange traded index fund and invests in stock that constitute the Nifty index. A regular monthly investment in this fund from September 2007 till November 2014, would have yielded a return of 14.10% per year. During the same period the Nifty has given a return of around 9.15% per year, barely matching the rate of inflation.
What is the point of investing in the stock market over the long term, if you can’t even beat the rate of inflation?
Now let’s say you had started investing in January 2008, when the stock market was at a then all time high level and continued to invest in the Nifty BeES till date. The returns on the systematic investment plan would be 14.84%. During the same period the Nifty gave a return of 4.5% per year. Some savings accounts would have given more return than that.
Moral of the story: Successful stock market investing can be simple and boring at the same time.
To conclude, retail investors entering the stock market in droves has been a clear sign of the market nearing its high levels, in the past. Is that the case this time around as well? This remains a difficult question to answer given that foreign investors are the ones really driving the Indian stock market.
As long as Western central banks maintain low interest rates, these investors can borrow money at low interest rates and invest them in financial markets all over the world, including India. Given this, the retail investor entering the market right now may not turn out to be suckers at the end of the day.
But the same cannot be said about the retail investors still waiting in the wings.
Stay tuned.

Disclosure: The basic idea for this column came after reading this piece in the Business Standard

The column originally appeared on www.equitymaster.com on Nov 13, 2014