Your equity returns can drop from 30x to 3x; here's how

Most experienced market participants would admit that the past 24 months have been anything, but linear. From the lows of March 2020 to the markets charting new highs daily, it indeed has been a phenomenal journey with millions of first-time retail investors flocking to the equity markets. They made handsome returns in the market’s meteoric rise from March 2020.

With the Nifty more than doubling from the bottom, and the smallcap index tripling from the bottom, likely, the first leg of the bull market is over. What this means is that the re-rating of stocks that happens from the bottom of the cycle often results in easy wealth creation. Does this mean that all hopes to make money in the future is lost for investors? The answer is an emphatic ‘No’.

This year’s Union Budget signalled a tectonic shift in the thinking of the government. With an increase in the deficit target to 9.5%, the government is taking a bold step to firmly push India into an orbit of high growth. Just like how Japan, Korea and China had a long phase of secular economic growth, the coming years could see India too having its exuberant period of secular economic growth.

Macro picture

India’s macroeconomic position is also healthy. Apart from having one of the lowest debt-GDP ratios compared to other major economies, the country has forex upwards of $600 billion. Furthermore, the RBI has maintained excess liquidity upwards of Rs 6 lakh crore in the banking system. What this means is that the central bank has enough firepower to keep exchange rates in check, and to keep stimulating the economy till it comes back to its growth trajectory.

In the backdrop of this favourable macroeconomic situation, India could be on the cusp of a long upcycle. India’s corporate profits to GDP is at about 2.5%, which is one of the lowest in almost two decades. The last decade has been about corporate deleveraging and balance sheet strengthening. Hence, India is starting an upcycle with low interest rates, low debt levels and surplus liquidity, making a compelling backdrop for an economic upcycle.

Wealth creation opportunity

Over the last 30 years, Nifty has given a return of 30x. If you missed the 30 best days of the Nifty, your returns would drop from 30x to 3x! This shows how vulnerable returns are to being invested in the best days of the market. And it is impossible to predict which days would those be.

Thus, remaining invested for a long period of time would be the key to wealth creation. And who knows with the opportune upcycle that we are sitting in, Lady Luck too could add a few percentage points to investors’ returns!

(The writer is chief investment officer at Teji Mandi. Views expressed are personal)