Beware lust and passionate love - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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26 SEPTEMBER 2014

As I wrote in a recent column for a magazine, "One year ago I described the Indian stocks markets as 'unwanted and unloved'. Today, there is a passionate lust and a blind love for all that is India. In August 2013, the Indian Rupee was the worst currency to have owned in the Emerging Market universe and the Indian stock market - as measured by the price movement of the various indices - was one of the worst places to be invested. Today, India is a darling destination of foreign money and for local punters who are back in the game. Discussions on market movements are the 'hot topic' at social gatherings and in office canteens."

Table 1: Locals rush in to join The Billion Dollar Club party - too late?
Month, Year Net Local Fund Activity (US$ m) Net Foreign Activity (US$ m) Index gain/loss 12 months later Index gain/loss 24 months later
March 2006 +1,008 + 1,504 +18.6% +54.8%
May 2006 + 1,738 - 1,602 +59.4% +72.1%
Aug 2007 + 999 - 1,899 -11.1% -14.3%
Jan 2008 +1,953 -3,304 -57.1% -21.3%
Aug 2014 +1,146 + 887 ???? ????
Source: SEBI Data, Bloomberg, Quantum Advisors

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As Table 1 above suggests, locals have started to believe in the need to own equity. This is good - as owning equity is one of the few ways to create wealth and outperform the threat of higher prices and persistent inflation eating into future lifestyles. However, there is a need to be measured and careful about how much one should start investing and when one should start investing.

For the fifth time since January 2005, local investors have bought over USD 1 billion of equity. Foreign portfolio investors have been sellers for 3 of the past 4 times that local investors have bought equity worth more than USD 1 billion in a month. On two occasions, the 12 month return and the 24 months return (after the month in which the locals bought) have been positive.
During the more recent instances (August 2007 and January 2008), the locals would have been wiser to have stayed away from equity.

It is difficult to say what the immediate future holds for investors in stock markets but, with a 50% surge in the broader market and the 100% surge in the highly risky mid cap and small cap indices, the risks of losing money for recent entrants may be higher than that of making money in the near term.

However, if the USD 1,146 million of local inflows represents the start of a disciplined SIP approach to investing - in which an investor commits a specific INR amount to the stock markets every month for the next 3 or 5 years - then there is no need to fear. While a decline in stocks in the near term may cause a "loss" for the initial investment made in August 2014, future commitments will add to the potential for profits. The ability to continue to invest in equity mutual funds over the next 3 to 5 years will average down the "buy-in" price and could result in sensible rate of return.

But, somehow, I don't think this will end well. Whenever mutual fund houses start telling you how great it is to buy into an equity mutual fund product, you kind of sense we are near the top of a market cycle! Beware the lust, beware the passionate love.

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Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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1 Responses to "Beware lust and passionate love"

Prasad Khanolkar

Sep 28, 2014

Sir, I request you to post your view on Shri Narendra Modiji as our prime minister. How you view things would shape up in the coming years. Your comments and views are much needed as they are crisp clear and to the point. Do give it a thought.

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