Invest in stock market for long term

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Invest in stock market for long term

Wednesday, 24 May 2023 | S Kalyanasundaram

Invest in stock market for long term

Market bravehearts do not panic when the Sensex falls; they see it as an opportunity

Mr Mahadevan is working for a multinational company and he gets a handsome salary. During the last ten years, many of his friends suggested to he invest in the equity market for handsome returns. He has tried this many times in the past. But unfortunately on many occasions, whenever he purchased some quality large-cap stock, due to various reasons the market had fallen sharply. After waiting for some time, he sold his stock at a loss. He has decided that he is not lucky enough to make money from the stock market.

Like Mr Mahadevan, many of us think that to make good returns from the stock market, we should be lucky enough. This may be partly true in the sense, if one is lucky, he may get an abundant return. That is if one is lucky, he may be able to ‘Buy low and Sell high’ consistently. This may give one sky-high return. But that does not mean that others cannot make a reasonable return. Return from investment should be evaluated on a comparative basis. So return on stock investment should be compared with Fixed Income Returns or investment in gold etc. Ideally, if one gets a return better than a return from a bank’s fixed deposit or post office savings scheme etc., he should be happy with that. One may or may not get an astronomical return from equity investment but it is possible to get a reasonable return if one is disciplined enough to make informed decisions and prepared to wait for a long time. Let us see an example. Let us assume that Mr Mahadevan invests Rs.1,00,000 every year in Sensex for ten years from 2011-12. Let us also assume that he is unlucky to the extent that he invests every year only when the Sensex is at the highest point of that year. After 10 years what would be his position?The Sensex as of 31 03 2022 was 58568. The highest points of Sensex during the years from 2011-12 to 2020-21 were as follows:19811, 20204, 22467, 30025, 29095, 29825, 36444, 38990, 42274 and 52517 respectively.

Assuming that he has invested Rs.100000 every year at the highest point, the value of each such investment (based on Sensex) from 2011-12 to 2020-21 as of 31 03 2022 comes to Rs.295632, Rs.289888, Rs.260682, Rs.195066, Rs.201302, Rs.196375, Rs.160707, Rs.150214, Rs.138544 and Rs.111522 respectively. From 2011-12 to 2020-21 year wise absolute return comes to Rs.195632, Rs.189988, Rs.160682, Rs.95066, Rs.101302, Rs.96375, Rs.60707, Rs.50214, Rs.38544 and Rs.11522 respectively. Annualized return percentage for these years (2011-12 to 2020-21) will come to 19.56, 21.10, 20.09, 13.58, 16.88, 19.27, 15.18, 16.74, 19.27 and 11.52 respectively. The return as of 31 03 2022 has been calculated ignoring the entry time (date/month of the year) as the exact date of the highest point of Sensex may be anywhere within that year. Based on the Sensex figure of 31 03 2022, absolute return and its percentage were worked out. The average return for the number of years has been taken as the annual return.

From the above figures, we can conclude the following:

In the long run, investments in large-cap funds provide superior returns. If one is prepared to wait, there is no negative return. For superior return, one doesn't need to be a lucky person. What is required is discipline to hold the position for the long run. During the last 10 years, the lowest annualized return is 11.52 per cent and the highest is 21.10.

When we make regular investments year after year under SIP, there is always a possibility of better returns. The above returns are calculated on the worst-case scenario of entry at the highest level of Sensex year after year. When the entry is at other times, the return should be far better.

Fortune favours the brave. Bravery is not confined just to soldiers or defence personnel, it is a dynamic quality within an individual, which decides his capacity to get a better return from his investments. If one is brave enough, he will not panic whenever the Sensex falls sharply. Such falls provide a long-term opportunity to buy quality stocks at a reasonable price.

(The writer is a retired banker)

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