Often, stock markets are regarded as a platform for short term speculation, especially in a rising market. Stock markets and equity mutual funds are vehicles for long term wealth creation. Investments in these should be made in disciplined way, irrespective of market levels. A retail investor should remain invested in stock markets over a few market cycles. It should be at least five years, in order to create wealth. A short term market timer is likely to lose money in the long run, unless he has the gift of predicting the future.
Unfortunately, many retail investors in mutual funds, too, think short-term. When markets peaked in January, gross inflows into equity schemes were at their highest, Rs.21,247 crore. As the markets started descending, gross inflows started dropping. In July, when the sensex hit a low around 12,500 ( almost 40% below the peak, gross flows were Rs.2,762 crore. Worse, redemptions as a percentage of gross inflows (36%) were amongst the lowest at the market peak in January and rose as high as 91% in July, with markets at the year’s low. Mutual fund investors sold when the markets were low and bought at the peak. This also leads to additional cost because of entry and exit loads.
Household exposure to stock markets accounts for less than 7% of household investments. Of the few retail investors who are exposed to stock markets, many invest in the wrong way. Retail investors should focus on long-term objectives of wealth-creation from stock markets.