Long Term Investors or Traders: On August 1, the BSE Sensex crossed the 82,000 mark and made an intraday high of 82,082, while the Nifty crossed the 25,000 level for the first time. Earlier on July 31, the stock market closed at 4 consecutive record highs. Whenever the index reaches a new high, most retail investors get agitated and ask the question, should I redeem my investment i.e. book profit?
The basic reason for this behavior stems from the fact that many investors have a trending mindset. In these circumstances, the question also arises whether to find timing for investing in the market or to spend a long time in the market? Sanjay Chawla, CIO Equity, Baroda BNP Paribas Mutual Fund has given some information which you should pay attention to.
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Better returns in the long term
A recent study by SEBI shows that 99 percent of investors who traded in futures and options actually lost their money. On the other hand, in terms of investment, instead of looking for timing in the market, investors who spent a longer time in the market got better returns in the long term. For example, we can see the performance of BSE Sensex.
In the last 12 months, this index has reached a high level 5 times in a row. The Sensex touched the level of 66589 on 17 July 2023, which was an all-time high for the index at that time. If someone had sold all his shares then i.e. on 17 July 2023, then he would have missed out on an increase of 22.75 percent in his wealth till 31 July 2024. Compared to 17 July 2023, the Sensex has gained 22.75 percent till 31 July 2024.
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Sensex : Debt and closing high
66,589.93 on July 17, 2023
70,514.2 on December 14, 2023
₹ 75,418.04 on May 23, 2024
80,049.67 on July 4, 2024
81,741.3 on July 31, 2024
On August 1, 2024, the Sensex touched its all-time high of 82129.49.
Source: Bloomberg. Past performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments.
Many benefits of long term investment
Long term investment in the market offers many advantages as compared to trading. In investing, you never put all your money at once or in a single stock. For example, you would want to invest the main part of your portfolio in a stable, strong performing equity fund with a long track record. Large cap funds are a safer option for investors as it can face challenges better due to its better ability to withstand market volatility. In investing, you follow a disciplined process where you benefit from rupee cost averaging while investing through SIP or withdrawing through SWP. On the other hand, in trading, you bet your entire corpus on one or more trades in a day.
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Stable investment performance remains better
If you come to the market with the goal of investing for a long period, then you have a higher chance of succeeding in earning high returns. That is, the performance of stable investments is better.
We can understand this with an example, how timing in the market versus timing of the market. Suppose the annualized return on lump sum investment of a fund in 10 years has been 12%. In such a situation, if a lump sum investment of Rs 1 lakh was made in that fund 10 years ago, then today the value of the investment would have been Rs 3,10,585. That is, a return of about 3 times.
Similarly, if we assume the SIP annualised return to be 12% in 10 years, then the value of a monthly SIP of Rs 5,000 would be Rs 11,20,179 (Rs 11.2 lakh), while your total investment would be only Rs 6 lakh.
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What’s the ideal strategy for navigating the market?
Investors should try to focus on their goals or investment objectives rather than worrying about market timing. You will be able to stay invested and grow your wealth irrespective of market conditions only if you stay focused on your goals and stay away from all kinds of rumours in the market.
Many investors, especially those who are new and inexperienced, invest in such investment options based on past returns without understanding the risks or studying them properly. Everyone should avoid doing this in the current market outlook. If you want better returns in equity, then stick to large cap funds in the current environment.
