One of the worst things you can hear about the markets is “its different this time” – because every boom is followed by a bust. It is the same things that keep appearing again and again in a different form.

What is different this time?

The equity market boom is hugely contributed to by the local investing population. Soon we will be putting in 1 Billion US $ every month as SIP. By no stretch of imagination is that a small amount of money.

Now see what is happening in the USA. The younger population is moving away from the equity markets. They are just staying away from investing. Since the tech boom (2000) US investors have withdrawn MORE THAN HALF A TRILLION US $ from the equity markets. In fact the shift from active management to ETF has also been magnificient. The active fund management industry, the tech newsletters, etc. are going through a real tough patch!

The American boom is DESPITE the American shareholder. The Indian boom is because of the small time Indian investor. Remember both the markets are in the middle of a consolidation or increase. No, I am not saying that because the market has gone up it has to go down, just saying that the market has been going up for the past few months. In fact the American market has been going up or remained steady since 2009.

As more Americans go to Robo advisers or ETF, there is an automatic asset allocation / reallocation that keeps happening. So there is a constant sale of Equities and buying of bond (I think it is not such a great strategy), but that is what the algo driven trades are doing.

The amount of money in ‘evidence based investing’ is increasing. Even in India today most investors are asking the following:

  • is my asset allocation right?
  • am I into too much of midcap, multicap,….etc.
  • should I do some direct equities – fund houses are pretty unimaginative
  • should I shift to the new fund houses like Motilal Oswal or Mirae?
  • why are fund management charges so high in India – the volumes are building up is it not?

these are good queries coming from the common man, doctors, investors, new investors, etc. It is a far cry from ‘should I buy Infosys’. Actually I like the fact that people are buying direct equity only with the excess money – the initial amount of investments is going towards SIP.

A lot of money in India too is getting rebalanced, even though there are many unqualified, greedy sales people who are selling equity and equity oriented balanced funds with a monthly dividend ‘bait’. Indian investors are investing more in equities because of the following reasons:

  • Irresponsible pitching of equity funds /hybrid funds with a monthly dividend bait
  • new investors are being lured into equities (from bank deposits) in a systematic manner
  • all the 500 equity oriented funds are buying about 100 listed equities – and that is taking the indices up
  • indices are getting a lot of money – thanks to NPS
  • penetration of mutual funds is improving dramatically because of rural penetration
  • robo advisors are spending huge amounts of money in pulling people into the investment fold

We are now in a nice state in the market. Money is coming in regular doses – remember FII buying is not much in Emerging markets – and that could change. Money is coming in large cap and mid cap funds in almost equal proportion. Funds like Icici Pru Discovery and Hdfc Prudence have a value orientation, and they are getting big monies too.

This means it is really ‘different’ this time. It does not mean that the market cannot crash from here. It can, but the rise has been far more gradual. If the market keeps going up steadily (which is tough, but not impossible) for say 2 years more SIPs would be in the green and the investors will be encouraged to behave sensibly. However if it has been sold like a Monthly guaranteed income for the next 20 years, there will be disappointment soon.

 

 

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  1. Keeping aside the market valuations for a while, what factors would make a local investor shun the SIPs? Given the amount of knowledge local investors acquired on equity markets through various media, I still believe majority would continue despite a crash. It is only fringe elements that run away for shelter.

    Having said this, greed might force someone to put everything in equity to earn few extra points of returns. As long one is investing for long term (> 10 years such as child education or retirement), I think continue SIP and do some simple asset allocation between debt and equity (20:80 or 30:70) as market continues to rise.

  2. Hi Subra,

    Your analysis with regard to the US markets is interesting. Both US and Indian markets are at a peak. However, due to local money, our markets continue to sustain the current levels.

    People are chasing mutual funds as returns from other asset classes are diminishing as each year passes by. Don’t you feel that creation of wealth can be done by investing in Mutual Funds with a long term of 15 to 20 years.

    SIP as one of the tools is a nice option to follow for disciplined investing.

    Trust you would agree.

  3. Whats is wrong with Equity Balanced Funds, which give monthly dividend? Should one stay away from them, even if dividend is not my primary aim?

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