Sandeep Sundaram has just completed two years working in the booming infotech sector. The 24-year-old has already built up considerable savings.
He does not have the patience, or the time, to understand the complexities of stocks, and the markets, but tales of 100 per cent-plus returns have pushed him to consider investments in mutual funds. Is he on the right track?
Well, the markets may be steroidal today but the stellar performance may not be repeated every year.
"The idea is to have realistic expectations, and not to expect that, just because the prices of equities may have doubled in the last year, they may do so again this year," says Tridib Pathak, chief investment officer at Cholamandalam Asset Management.
While the companies whose stocks made up the Sensex (the benchmark 30-share sensitive index) a year ago were valued at nearly 13-14 times their earnings last year (referred to as price-earning multiple or PE), this year it's already reached the 20s, almost a 50 per cent premium to other emerging markets in the Asia Pacific region.
Earnings of the Sensex companies grew at an average 30 per cent last year, leaving the majority of last year's appreciation in stock value to be accounted for by the so-called PE re-rating.
Given that the relative valuation of Indian companies to their profits is not likely to appreciate much more, or may even correct to ease the gap between the Indian and the neighbouring markets, stock prices are likely to grow only at the same rate as the profits of the companies over the coming months, say most experts.
But equities still present a good long term investment option. "Historically, equities have proved themselves to be the best asset class over the long term, of say around five years. They are then able to provide a return of around 10-15 per cent per annum. While this may look modest, it still is much more than the alternate asset classes such as deposits and bonds. Comparison must be made with the other options before an investor, not with the past performance," he adds.
So, what should Sandeep do?
Prepare for a long haul, says Ramdeo Agrawal, joint managing dircetor of Motilal Oswal: "For someone who is an ordinary investor who wants to share the equity story by going through the mutual funds or one of the large-cap, front-line stocks, time is the key. For such across-the-market investments, in the current situation, he must be able to give a holding period of at least three years." For a 24-year-old, that does not seem to be too long, or too difficult a wait.
