Stay Invested with Indian Equities.

Let me start with my own start with equity and why I have most of my investments in Equity and have a full financial freedom, choice to stop working any day and a good corpus for my family. It was2001 and I was blessed with a boy. 

Grandfather gifted a good amount to him. I invested half in RBI bonds and half in Indian Equity. Post 7 years. 10 lacs with RBI Bonds accumulated to 15 lacs , while equity fund made it to 70 lacs( thanks to that bull run of 2004). It wast that day and I have not invested a penny in fixed deposit. It has been equity all the way. 

I always stay invested, continue with my sip, add more to corrections, increase SIp when corrections are major and show patience when markets consolidate and goes through time correction 

Many Investors who have made good gains in Indian Equity are thinking of booking profits and may be trying to re enter on corrections or investing in other asset class. Wealth is created by staying invested and enjoying the power of compounding. Many have been creating noise of correction since Nifty was 20000 and missed out the entire rally. 

India is in in a multi year  bull market as US was in 90's . Quoting few excerpts from Morgan Stanley recent report

India’s Bull Market Revs Up  

Morgan Stanley expects India to drive one-fifth of global growth in the coming decade—an assumption that hinges on the country’s growing status as the back office and factory to the world, as well as a burgeoning consumer class empowered by a digital economy and a transition to green energy. India’s stock market reflects this narrative and has been on a steady rise, marking new highs. Investors’ confidence in future growth and moderating volatility, especially compared with other emerging markets equities, is driving up the price to earnings ratio. 

 

Private spending growth: . Private spending, on weak footing for much of the last decade, has been showing signs of recovery on the heels of significant infrastructure investments by the government. Indeed, private sector projects in the works were growing 16.9% in December 2023, versus a decline of 4.2% in December 2019. “Our view is that in three years, India could move from primary deficit to balance,” says Desai. “The resulting widening gap between real economic growth and real interest rates would provide more support to share prices.”  

 

India’s 401(k) moment: Currently, Indian households are less exposed to equities relative to other asset classes such as gold, but that is set to change. A 2015 change allowing retirement funds to invest in stocks is expected to create a demand cycle akin to what the U.S. experienced from 1980 to 2000, after a new law allowed employees to put some of their paycheck toward tax-deferred investment in stocks via retirement plans. “Domestic flows to U.S. stocks surged over two decades after that change. We see a similar boom in India coming, but expect it can last longer than 20 years given India’s much younger population and the low starting point of equity ownership,” says Desai. 

 

Rising Social Equity:  Forecasts for 7.9% growth in gross domestic product for this year and 6.8% in 2025, should help diminish poverty further and feed a cycle of job creation, higher consumption and growth. “We think the continuing decline of poverty and rising worker and consumer class is one of the most underappreciated trends unfolding in India,” says Desai.  

 

Other factors driving the bull run include: a burgeoning ecosystem of startups, in particular those addressing deep tech and agriculture needs; competition among Indian cities and states to be innovation and investment hubs; and a lending boom driven by digital credit enablement system that could give several million previously unbanked people access to financing. 

 

Staying invested in Indian equity markets, or any equity markets, is often advocated for long-term wealth creation due to the power of compounding and the potential for higher returns over time. Here's a detailed breakdown of why staying invested is crucial and how booking profits prematurely can hinder the compounding effect:

1. Power of Compounding

• Compounding refers to the process where the returns earned on an investment are reinvested to generate additional returns. In equity markets, long-term investments allow both your principal and the returns (like dividends and capital appreciation) to grow exponentially over time.

• Indian equities, due to the country's economic growth, offer attractive long-term returns. Staying invested allows you to benefit from this compounding effect over multiple years or decades.

  Example:

  • If you invest ₹1,00,000 in the stock market and earn an average annual return of 10%, after 10 years, the value becomes ₹2,59,374. After 20 years, it’s ₹6,72,750. The longer you stay invested, the higher the compounding effect.

2. Market Timing is Challenging

• Many investors try to "book profits" during market highs and re-enter during lows. However, timing the market is difficult, even for experts. Missing just a few of the market's best-performing days can significantly reduce your overall returns.

  Example:

  • If you missed the 10 best days in the Indian market between 2000 and 2020, your total return could be drastically lower than someone who remained invested throughout.

3. Premature Profit Booking Breaks Compounding

• When you sell investments to "book profits," you're effectively stopping the compounding process. The money you take out stops growing, and you lose the potential gains you could have earned on those reinvested returns.
• Compounding works best when left uninterrupted. Investors who sell during short-term market fluctuations often lose out on the market’s long-term uptrend.

4. Emotional Bias

• Investors often book profits due to emotional reasons (fear of a market crash, or the excitement of short-term gains). But historically, equity markets recover from downturns and reward those who stay patient.

  Example:

  • In the 2008 financial crisis, the Indian equity market (Nifty) fell by over 50%. Many who sold at the lows missed the strong recovery that followed. By 2010, the Nifty had recovered most of its losses, rewarding investors who stayed invested.

5. Opportunity Cost

• When you book profits and hold cash or invest in low-return assets, you may miss out on the higher returns equities offer over the long term. Those who hold onto their investments typically benefit from dividends, stock splits, and capital appreciation, all of which can compound over time.

6. Long-Term Trends in Indian Equities

• The Indian economy is one of the fastest-growing in the world, driven by demographic factors, urbanization, and increasing consumption. The stock market generally reflects this long-term economic growth.
• Staying invested in quality companies or index funds in India allows you to participate in this growth, potentially yielding much higher returns compared to short-term investments or frequent profit booking.

When we book profits in equities unnecessarily, we often trade-off small, short-term losses for larger, longer-term losses. So, whenever you feel the need to protect your profits, simply remember: Compounding is free until you choose to pay for it!

illustration of past returns when investors booked profits and parked in debt funds on reaching a particular return and how they made less gains than those who stayed invested 

Conclusion:

Invest and hold strategies benefit from the power of compounding, which allows for exponential growth over time. By frequently booking profits, investors interrupt the compounding process and reduce their long-term returns. Equity markets, particularly in growing economies like India, reward patience and long-term investments, making it important to stay invested rather than focusing on short-term gains.