Your real test as an Equity Investor is now

The equity markets post the first lockdown in 2020 and throughout 2021 not only exceeded expectations but also left most experts unable to make sense of it.

2022 so far has been underwhelming in relation to how the equity markets performed throughout 2021.

So for two years post the first lockdown till now, it would not be wrong to comment that the equity markets could not have explained better as to why one should not expect linear growth when investing in equities.

There is no better time and situation to understand your true risk profile.

Your real test as an Equity investor is now !

What is ailing the Equity markets

Inflation

Post the 2008 financial crisis, central banks across the globe have kept interest rates on the lower side to encourage growth.

A very obvious side-effect of this approach is the rise in inflation since easy liquidity fuels inflation.

Coupled with the Ukraine-Russia conflict and the continued lockdown in China disrupting the global supply, rising rates have added to inflation.

In March 2022, the US for example had its highest inflation rate for around 40 years.

To counter the rising inflation, in May 2022, the Reserve Bank of India hiked the Repo rates by 40 basis points to 4.40%.

Additional reading: Click Here to read whether you are affected by the Dilderot Effect

How inflations impacts Equities

High inflation brings along with it higher interest rates in order to tackle high inflation.

Higher interest rates means higher input costs for businesses.

These higher costs are then passed on to the end customer.

All of this leads to higher prices for the end customer.

Demand therefore takes a hit which in turn leads to slower economic growth.

Lower economic growth would mean pressure on earnings growth of companies which therefore means moderate growth for the companies.

Ukraine- Russia Conflict & The China lockdown

Just as most of the world was coming back to terms to some sort of normalcy, the Ukraine- Russia conflict has thrown a spanner in the works.

China continues to struggle with containing Covid and therefore stricter lockdowns still prevail.

Both these situations have disrupted the global supply chain.

Crude oil has touched new highs while there are fears of an impending food scarcity.

The Ukraine-Russia conflict has completed 100 days and there are no signs of a ceasefire yet while the stricter lockdowns in China too show no signs of receding.

Equity markets do not take a liking for uncertainty !

Additional reading: Click Here to read why should Not invest in equity mutual funds

The Path Ahead

The lure of Fixed Saving Instruments

In recent years the first real push retail investors felt towards the equity markets was due to Demonetization.

The second and an even bigger one was post the first lockdown.

During this period FD rates tumbled, growth in the real estate as a whole was still in a limbo phase and gold despite being seen as a safe haven was not generating lucrative returns.

These factors in reality compelled the average retail investor towards equity markets rather than any sudden realization of the long term growth potential of equity investing.

Now that FD rates are slowly and gradually ascending & the real estate market has sort of seen a mini revival, it will be interesting to see whether real investors stick around with the equity markets showcasing its volatile nature.

This question has been prompted since fixed deposits guarantee fixed returns even though the returns are on the lower side whereas equities are now currently in a very volatile phase even though in the long run they not only beat fixed deposit returns but also inflation.

The surge in new equity investors was during and post the first lockdown when most of us were at home and the equity markets rose beyond reasoning, demat accounts were opened in record numbers.

None of these equity investors have ever experienced a major market correction, let alone a market crash.

Will they see the volatile markets as an opportunity to invest further or panic and exit is something only time can answer.

Flurry of Information

Be it a bull market or a bear market, there will always be enough media presence explaining how things will likely get better or worse.

There is nothing scientific about this, it is easier to sell bad news when things look bad and good news when things look good.

During a bull market it is very common to hear and read news about how the Sensex and Nifty will touch record highs in the next few quarters or years and during a bear market or even a minor correction it is very common to hear & read news about how much of investor wealth was wiped off (notional losses, not real), the number of years this new market correction will linger on and how doomsday is closer than you can imagine.

There is nothing wrong in trying to explain why the markets are currently behaving in the manner that they are.

What is wrong though is in expecting the markets to behave exactly the same in the manner as they are today

It is easier to stay optimistic about the future when things look great presently and extremely pessimistic when things are not so great.

We expect the future to be exactly as how our present is, even though history has proven that to be wrong since the beginning of time.

A mutual fund portfolio is not made for a bull or a bear market, it is supposed to be made despite them.

Whether you are able to avoid outside noise or do act on every random article predicting new highs or lows will eventually decide whether you have the stomach for equity investing.

Notional Losses

Notion refers to an idea.

Any idea without execution of it is just that, an idea.

Notional losses therefore refers to losses that are losses on paper like an idea, not real.

For it to be real, you will need to execute on it.

In simple language when you execute redemption of your funds, your losses become real and until then they are merely notional losses.

In a bear market or a major market correction, it is very tempting to act on several media & ‘expert’ claims that the market is going to touch a new low and it is better to move out.

Whether you act on these claims and transform your notional losses to real losses or stay on course to achieve your long term goals will decide whether you’re a long term equity investor looking for growth or a short term trader disguised as a long term equity investor.

Remember, volatility is not a bug but rather a feature of equity markets.

As an equity investor, you do not invest for today.

Therefore logic demands that you do not take decisions based on the market conditions today.

If you prefer the returns of today over the potential returns that equity investing can fetch you over the years then may be equity investing is not your cup of tea.

Do not let your ego get in the way of an uncomfortable truth for it cannot compensate for your impending real losses.

Growth in equity investing does not happen over- night but rather over several nights, you can either dream peacefully or let it be your worst nightmare.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.

Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing