Long term investment strategy is the best for uncertain equity markets

After inflation, interest rates and currency, it is now the turn of crude oil to affect the equity markets across the globe. Expectedly, the domestic markets too turned nervous. That also meant equity investors could not take things lightly and should brace for more volatility in the coming days.

The current weakness has come at a time when markets were showing signs of stability in the preceding trading sessions. The turnaround in the mood prior to the correct weakness was largely on account of good corporate results coupled with increased buying activity from domestic institutional investors.

According to industry sources, insurance companies had turned active in the last few weeks as they were sitting on a good corpus. Their buying interest was understandable as most of them would have mobilized good corpus at the end of the previous financial year. Most insurance companies step up their collection drive between January and March, coinciding with the last minute tax-saving period.

The buying activity of domestic institutions is also a good sign for the markets which is hoping to reduce its dependence on foreign institutional support. Though we still have a long way to go in terms of being completely independent of FII money, the change is clearly visible.

In fact, lack of buying interest from FIIs could become the order of the day in the coming years, thanks to the volatility in the currency market. Every weakness in the dollar could erode the profits of FIIs and it could become more taxing for these investors to show good performance to their investors in a weak market scenario.

The domestic institutions, of course, need the support of local investors who need to keep faith in the local economy’s long-term story and need to look at equity as an integral part of their portfolio. Unfortunately, at present, only a small percentage of investors here have been betting on equity and a good chunk of these investors come with short-term aspirations. For many fresh investors, equity is a ticket to short-term high returns. In reality, it could fire back.

As a result, many of these investors lose money heavily. Though in many cases, these losses are notional, the investor tends to panic as he enters the equity market without much staying power. On the other hand, the same retail investor is comfortable to wait for a long term with his other investment products. Take the case of Public Provident Fund or monthly income schemes offered by post offices which expect investors to hold on to their investments for a minimum period of six years.

The lack of patience with equity could also be due to the fact that the whole investment product is more transparent. For instance, an investor is not worried about the market value of his property simply because he has no access to market value of his investment at frequent intervals.

However, the time has come for investors to take a much longer view on their investments simply because the next few quarters are going to be challenging periods for equity markets. Also, history has shown that even in an uncertain and weak markets, long-term investors have managed to see positive gains. For instance, even at current market levels, investors who made an entry more than three years ago have seen their portfolio double or yearly return of more than 35-40 percent.

Investors who don’t have a risk appetite for the equity markets should keep away. Those who wish to have stocks in their portfolio should make it a habit to think long-term. The task gets easier if they take the systematic investment plan route or the systematic transfer plan route as they allow investors to take advantage of market volatility. For those who are not comfortable with monthly investment plans, lump sum investments with a minimum horizon of 2-3 years is a must as the domestic corporate story is a good bet.