Why is the average investor confused by equities? And why doesn’t he earn anywhere close to fair returns from his investments? It’s not rocket science: equities are a remarkably simple asset class, in fact. But in the 20 years that I have been in the markets, I have lived through three major cycles — and in each one of these, the majority of investors mistimed their investments. That’s, in fact, a very disturbing statistic.
As the Sensex went up from 3,000 levels in 2003 to a peak of above 21,000 in January 2008, before ending close to 15,600 levels in March 2008, net sales of equity mutual funds increased from just ₹118 crore in FY03 to ₹53,000 crore in FY08. Since then, in down markets and at lower P/E multiples over the past four years (FY09-12), cumulative flows into equity funds have been negative ₹6,000 crore. In simple terms, when P/Es were high, more than ₹50,000 crore worth of equity funds was purchased in one year and when P/Es were lower, nearly ₹6,000 crore worth of equity funds was sold or redeemed by investors across the country.
That’s a basic, return-unfriendly approach to investment so it’s really not surprising that most investors aren’t satisfied by the return on equities. But in an all-too human way, they blame the market when it’s their investment strategy that needs work. And as long as they continue investing disproportionately large amounts after strong past returns and at high P/Es and investing close to nothing after poor market returns and at low P/Es, investors will continue to gain less from equities and will continue to feel dissatisfied.
They’re certainly going about the same way even now, going by the current lack of flows in equity funds for the past several quarters and, in fact, some redemption. Albert Einstein summed it up very nic