The Reserve Bank of India also stepped in with proactive intervention in non-banking finance companies and payment businesses. All these have served the investors by bringing down the valuation premium the small and mid-cap stocks enjoyed over the Nifty50 index.
Volatility, an inherent element of the market, poses a dilemma for inexperienced investors. However, whether volatility serves as a risk or an opportunity depends on the mindset of the investor, particularly in the realm of long-term wealth creation. Let’s delve deeper into this concept.
From 1980 to 2023, the Sensex experienced corrections of less than 10% in a year only four times, underscoring the rarity of such events. Intra-year declines of 10-20% are common, with notable corrections of 60% in 2008 and 38% in 2020. Despite these fluctuations, the index yielded positive annual returns three out of four times. Over the past decade, ending February 29, 2024, the Sensex TRI delivered a solid 14.6% annualised return.
The disparity between the robust performance of stock indices and equity mutual funds and the underwhelming performance of many personal portfolios stems from investors’ tendency to exit prematurely, fearing corrections. As Peter Lynch aptly observes, more losses stem from preparing for or anticipating corrections than from the corrections themselves.Structural advantages such as benign energy prices and the anticipated reduction in interest rates will further contribute to the profitability of companies, which shall boost the equities markets. Reverse globalisation and China +1 sentiment are sweeping across the world.Till it is sustained, we believe that the new ecosystem that is being created to enhance domestic manufacturing capabilities and fuel import substitution, driven by a new breed of entrepreneurs, will continue to provide earnings growth. Many of such high-growth businesses will be in mid and small-sized companies. These are expected to do better than the large part of the market.Despite these positives, volatility is not going to go away. Investors should leverage it to enhance portfolio returns. Systematic investment plans (SIPs) can be of great help, as they help to buy more when stocks correct. Between CY2000-2023, seven years of SIPs in the Nifty 50 index have given 15% returns, on average. SIPs in well-managed mid-cap and small-cap funds can be rewarding for long-term investors due to the ongoing phase of robust earnings growth.
SIP investments need to be further supplemented with additional lumpsum investments in turbulent times to improve overall returns. Smart investors have been actively pursuing this strategy. In the past, we have seen a spike in inflows into smallcap schemes as a percentage of total inflows when the market is volatile. For example, the net inflows in smallcap as a percentage of total inflows show spikes in volatile phases of November 2019, June 2020, August 2022, and April-June 2023.
This SIP and lumpsum combined approach during turbulent phases can amplify portfolio returns, presenting investors with a strategic avenue for wealth accumulation.
