The equity markets are buoyant and have been making new highs lately. Retail investors have been actively investing in the markets largely through Diversified equity and balanced funds.
Systematic investment plans (SIPs) are the preferred route for investing and have been increasing every month, currently standing at Rs 5,500 crore a month.
In addition, lump sum flows have also been robust over the last year. In fact, lately strong domestic flows have acted as a counterbalance to volatile foreign flows.
Equity returns have been spectacular over the last few years, which has given confidence for investors to enter the markets even as they tread into higher valuations.
One of the concerns is that many of these investors have not seen a true bear market cycle and it is difficult to predict their reaction if the markets do correct sharply.
That is where investor education is a must to educate them towards treating equity as a long-term investment and the ability to stay patient through sharp equity drawdowns.
Let’s look at the historical performance of Indian stock indices. Sensex and Nifty have been the flagship indices for the Indian equity markets and have seen a huge appreciation through the years, but at the same time, there have been several sharp corrections.
For instance, had you invested just prior to the Harshad Mehta scam in 1992 or before the Global Credit Crisis in 2008, your investment would be down by 40-50% within a year!
Similarly, the market witnessed crashes during the Asian credit crisis in 97-98 and the dotcom crash in 2000-01. But, the markets did bounce back eventually and those who chose to stay invested reaped the benefits.