It has been more than a year now after Prime Minister Modi announced demonetization of high value banknotes. On 8 November 2016, the government announced the cancellation of Rs 500 and Rs 1000 notes as legal tender resulting in 86% of the circulated money being removed from the economy overnight.
The immediate impact of removing so much money from circulation was majorly on sectors that were driven by the black economy like real estate, construction among others. Apart from these segments, sectors that are more driven by cash also got affected when so much money was suddenly removed from circulation.
There had been many talks of the pros and cons of the demonetization on the economy at the beginning of the current year and many investors started shuffling their asset allocations and portfolios. Many investors have thought this move could slow down the economy drastically which could impact the equity market as a whole, while real estate could face the worst brunt as it has major cash component involved in the transaction.
Also, fixed income funds could give great returns as interest rate could go down. However, as we approach the end of this year, things were quite different and below mentioned are some of the regrettable investments made by the small investors.
Pharma & IT take a beating At the start of the year 2017, in anticipation of the effect of the aforesaid structural event (demonetization), many investors started restructuring their portfolios in various asset classes, which resulted in the most regrettable investment strategy till date. The street was expecting few sectors to be worst effected and some other asset classes to get benefited. Major chunk of the investors assumed demonetization impact will be negative on the aggressive realms like banking and financial sectors and started shifting their money to the defensives like pharmaceuticals and IT as these sectors seem to be available at lower prices post two years of correction. Also, investors expected these sectors will be safe bet as their major revenue comes from exports and expected rupee to decline further against dollar. However, markets proved them to be absolutely wrong as both the sectors were the top two underperformers in 2017 where NIFTY PHARMA generated returns of -10.76% & NIFTY IT generated 7.22% return.
Also, the mutual funds whose underlying asset is pharmaceutical & IT stocks have given negative returns. Similarly post demonetization, investors also turned extremely bearish on realty sector as most of the transactions are done through cash mode in the construction activity. But the numbers are showing a completely different picture where NIFTY REALTY has generated a whopping 89% return in 2017. This shows that the most regretted sector post demonetization has generated the highest return till date. Coming on to the consumption sector, it was interpreted that consumption activity would become stand still due to cash crunch in the economy. But on the contrary, NIFTY CONSUMPTION Index has gained more than 36% in the current year and put all the negative talks on the sidelines.
Debt funds disappoint
Secondly, the investors also started infusing money in to safe havens like government bonds on expectation of lower yields amid high cash liquidity in the banking system due to demonetization. A majority of the investors believed there could be sharp rate cut by RBI amid high liquidity and would see spurt in bond prices and the debt funds could give strong returns back to back for second year. However, bond and debt funds have in fact yielded returns lower than the bank term rate. Debt funds of long term have given returns of 4-6% which was marginally lower than the liquid funds. Also, the RBI was not aggressive in cutting the interest rate which also dampened the expectation of bonds to shoot up.
Some of the investors put their money into precious metals which are considered safest investment. Post demonetization, investor thought gold would be safe place to hide and could see good appreciation anticipating demand of the yellow metal would zoom as people would trim cash holding and move the same to gold. However, gold disappointed by giving around 10% of return year till- date. Still, it has outperformed silver, which generated mere 6% return during the calendar year.
Some of the investors wanted to move the money into other foreign currencies expecting rupee to fall post the demonetization. However, rupee has appreciated over dollar during the year. Rupee, which was trading between 68-69 against the dollar at the beginning of 2017, is now trading around 65 levels, which means anyone who has held dollar would have seen erosion of 5-6% of capital during the year.
Even after witnessing a roller coaster ride, equity markets have outperformed all other asset classes during 2017. After analyzing the above data points, it is to be concluded that investors might have regretted their mistakes if they missed the bus amid roaring talks of the pros & cons of the demonetization.
Committing mistakes are part of life. Without touching fire, you won’t be able to understand the feel of burn. In India, people are still very cautious about investing in stock market. They prefer keeping their money in banks, post offi ces, etc where they get fi xed returns. This is also a fact that there are only few people who get succeeded in making money from stock market. Whereas, most of the people have underperformed who never invested in equity market.
Well, the saying ‘share market is not for all’ is perfectly true. But this doesn’t mean that no one should invest in it at all. While turning a profit on our investments can be an exhilarating experience, it is much tougher to cope with the excruciating pain when we lose our hard-earned money on a bad investment idea. Specifically, many investors damage their portfolios by under-diversifying, trading frequently, following the herd, as well as selling winning positions and holding on to losing positions. Follow disciplined approach: However, the investors who put in money systematically, in the right shares and hold on to their investments patiently have seen outstanding returns. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind. The best way is to do the same is through SIP route to take advantage of rupee cost averaging (you buy at market highs as well as lows, averaging out your risk as well as returns). The amounts get invested automatically at fixed intervals and the chances of continuing the investment for a longer period are higher. SIP enables you to invest in a disciplined manner. However, a few things you need to keep in mind while designing a SIP portfolio - the asset allocation and decide the number of schemes in the portfolio.
Meanwhile, as we are living in a global village, any important event happening in any part of the world does have an impact on our financial markets. Hence, we need to constantly monitor our portfolio and keep making changes as the situation requires. If you can’t review your portfolio due to time constraint or lack of knowledge, then you should take the help of a good financial planner, who is capable of doing that perfectly.
A good run for equity market in 2017 doesn’t guarantee its future performance. However, equity market has rewarded the patient investors in spite of many volatile months and years. Like the old saying that one should not put all the eggs in one basket, one should follow portfolio diversifi cation irrespective of returns on investments. Thus, I would conclude and say diversify your investment in various asset classes and keep a tab on the same on periodic basis. If an investor had put equal money in the assets classes discussed above (debt funds, gold, equity, and currency), he would have been better off making decent return with reduced risk.