Understanding Risk and Return if investing in Equity Today

Understanding Risk and Return if investing in Equity Today

Many investment experts are telling to invest in equity as many stock and indices are 30 % to 40 % down from its peak ( Nov – Dec 2019 ) level . Can we superimpose past mathematical facts and calculate forward return ? . This time Risk is different from all risk what we have seen in the past. Last such similar type of health related risk (Spanish flu) was 100 years back . Sensex , the oldest indices came into existence in 1980. All previous recession was not having risk of today so just on the basis of past market indices data and movement we can not tell exactly by what time “x” return will come  . Yes but one thing is for sure that there will be upside but from when , how much can not be told.

Lets remember Risk is not dependent on  return but return is a function of risk . So we need to understand risk. 

Valuation at any point of time reflects all the risk incorporated by the market . But more than Valuation important is the trend of valuation ( falling/ rising  ) as that reflects the mindset ( fear/greed ) of market participants .

Valuation at any point is a static variable whereas trend of valuation is dynamic in nature i.e. changing regularly. Apart from Valuation level one should also give importance to trend in valuation.

The risk in Nov-Dec 2019 was not the same as what the risk is today and risk will not be same 6 month or 1 year or x year from now . Risk changes every second , every minute , every day . Change in Risk leads to trend ( fall/rise ) and the valuation .

In Dec 2019 – there was hardly any risk from Covid 19 .

Today – Covid 19 impact . heavy sell off from FIIs . The mindset of FIIs is aligned more with the Covid 19 impact in their economies . Stock market falling there . In india -- Domestic investors still holding by and large . Have we seen the worst of Covid 19 in India ????? . Has Indian Stock Market factored Covid risk in India . Please remember up till now its Indian Stock market impact is more from external risk and not from internal risk .

Tomorrow ( Short term ) – Much depends on Covid 19 impact ( external and internal ) . God forbid nos in India remain less and under control . But if that not happens then our stock market will factor this risk also .

Its not a question of 30 % discount sales but what’s ahead in short term and post Corona .

Post Corona Situation – (1) Since all countries are affected their economic policies will have domestic orientation. Will then FIIs and FDIs will invest in India and how much they will invest ?  (2) Banks were already under asset stress pre Corona . With businesses getting beaten , earnings will dip and chances of more NPAs in bank Balance sheet (3) Government will have lesser Corporate tax so will impact Government spending (4) Retail Individuals spending priority will change . Luxury and discretionary expenses will see reduction and impact on such industries . (5) Govt might resort to borrowing through G Sec and surplus money will move there (6) Even Corporate expenditure will see overall reduction and prioritisation w.r.t various head of expenditure and that will impact sales, revenue and profit .

A lot depends what will be government economic and industry policies and that will decide how quick India recovers back to normal level .

Best Strategy – hold cash as no one other than God knows if we have reached bottom .  Also your next 3 to 5 year defined planned major expenditure should be ensured by debt investment . If not done first do that .

After that If  have excessive surplus of cash and want to invest then invest in large cap with clear limit order . Go for stop loss or profit booking strategy . Put limit order with spread on bid/ask price . The spread should be realistic and realisable.

MF is the best Option – As managing the risk is key to investment there can not be better option than Equity Mutual Fund . Most of the risk and strategy which has been mentioned above will be taken care better here than direct investing . Whether evaluating Govt policies, industry wise exposure , Company wise allocation, Cash position , Tactical calls etc a research driven professional fund manager will do better than any other individual.  

SIP helps you to get invested in staggered way at different valuation level  . If you have lumpsum that one can invest in staggered way . say 10 % now . If fall of say 5% then next 10% and so on . But in either case the investment horizon must be minimum 5 year or more.

Rather than trading in direct Equity better will through MF ETFs with same stop loss, profit booking strategy with limit order with spread on bid/ask price .