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Wednesday, September 07, 2016

Buys High and Not Low- That's the Indian Share Investor..!

Investing Mantra's - Stock:

Buys High and Not Low- 

That's the Indian Share Investor.

by Mr. Vivek KaulEquitymaster.com


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. 

Financial YearShares & 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 RBI

The table shows the portion of gross national disposable income (basically the GDP number adjusted for a few other things. For a made up for by investments in shares & debentures, which are a part of the household financial savings.

In 2011-2012, shares & debentures made up for 0.2% of the gross national disposable income.
Vivek Kaul
By 2015-2016, this had jumped up to 0.7%. 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 & debentures. 


The trouble is that for some reason, which actually makes no sense, the RBI puts out the data for shares & 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 2 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 5-year period. On the other hand, the SENSEX returns during the period stood at 30.5%.

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% during the course of the year.

The assets under management of equity mutual funds on the other hand, went up by 12.8%. 


In fact, during the period, the SENSEX achieved its highest level on January 29, 2015, when it closed at 29681.77 points. Between then and March 31, 2016, the SENSEX fell by 14.6%.

 At the same time, the assets under management of equity mutual funds went up by 14%. 


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 & debentures has increased from 0.2% of gross national disposable income in 2011-2012 to 0.7% 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. 


Buys High and Not Low- That's the Indian Share Investor..! Reviewed by S. Chitra on September 07, 2016 Rating: 5 Investing Mantra's - Stock: Buys High   and Not Low-  That's the Indian Share Investor. by Mr.  Vivek Kaul E quitymaster.com ...

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