investment strategy: Advice for new-age stock investors: 2021 is an aberration, don’t always expect short-term gains

For Indian stock market watchers, one of the most salient features of the past year has been a surge in retail participation in the stock market, with data from the central depository showing an increase of more than 100% in accounts. investors from March 2020 to September 2021. Many of these new additions include new market participants, especially people in their twenties, says Vasanth KamathFounder and Managing Director of an equity investment platform small business. Kamath believes that investors should treat the market activity seen in 2021 as an exception to the norm and avoid building expectations of short-term returns through equities as an asset class, which has always been known for its long-term gains.

“People shouldn’t change their expectations or have random expectations about how the asset class will perform in equities over a year. Like if you look at the last five years or the last 10 years, there’s always been a standard rate of return and that will continue for the long term as well,” Kamath said in an interview with Edited excerpts


We’ve seen that there’s been a surge in the number of, say, new era retail equity investors who are in the 20-year-old age group. What would be the risk factors for these new era entrants, especially given that we have experienced a considerable degree of volatility over the past two months?
Two or three things mainly. The first is that, as you mentioned, not just last year’s volatility; 12 months to 18 months also saw high volatility and this should not define expectations for optimization or expectation of short term returns. Stocks as an asset class are always known for their long-term nature that gives you sustained capitalization and returns.

This is something people shouldn’t change their expectations about or have random expectations about how the equity asset class will perform over the course of a year. Over the last five or ten years, there has always been a standard rate of return and that will continue in the long term as well.

This year has been more of an expensive year or an aberration rather than just being the norm, so tempering expectations is one.

Also today, a lot of the behaviors we see involve keeping their assets or money invested in an asset class that they believe will perform very well. But that won’t always be the case. It is therefore important to have money placed in different asset classes so that they benefit from both the highs and lows and returns of each asset class. This is something many new entrants will achieve over a period of time, but the sooner they do it the better it will be for them and their investment.

In terms of valuations, what’s your view on the year ahead, as we’ve seen a flurry of IPOs and expensive valuations, so what’s your view on our current price?
From a valuation perspective alone, on an absolute basis, it doesn’t make sense to comment on this. You have to look at it against the growth and earnings and the lines of business of all these companies and that has also increased. Both have grown. There may be differences in proportionality, but this is not unjustified. Obviously it goes up, but again, what you have to understand is that when they invest in stocks as an asset class, they invest in different companies.

Some companies will do better because of how they change their business plans given that the past 18 months has obviously favored digital.

From a broad market perspective, the valuation to earnings ratio hasn’t changed much as earnings have also increased, but when I say this year is an aberration, if you just look at returns across the market, it’s maybe 4X-5X of what we should ideally expect.

There has been a lot of debate regarding cryptocurrencies lately. We have also seen the government’s response. In terms of asset allocation and especially for new era investors, what should be the allocation between, say, something like crypto, IPO and something that’s a relatively safer bet ?
I don’t think you can group them all in the same category or put them in the same compartment. For example, cryptocurrency is very recent because it is an emerging asset class. Three or four years ago it was more of a currency or a method of payment, a means of transferring value rather than a store of value and that has obviously changed more recently.

There are more and more use cases piling up on all crypto assets, crypto coins, etc., which is why more and more people are comfortable with considering it as an asset class. My personal opinion is that there are enough people who recognize the potential applications and use cases for it and that is where crypto is at today. But I don’t think it’s as well defined as it should be and it might actually become the case over the next five years.

We believe that every portfolio deserves an allocation to this new asset class. Now it depends on the investors themselves, their profile, their age group, their risk tolerance in the portfolio. That number should vary, but for someone my age, the kind of risk level I have — I have 3-5% of my portfolio allocated to something like crypto, but that could be very different for someone looking maybe for more or less volatility, more security.

I wouldn’t consider IPOs to be a different asset class than stocks. It’s ultimately that and I know a lot of people look at IPOs as a way to try and get into it, if it works out well on the day of the quote and there’s a rise throw them away also. But that’s not the right way to look at IPOs at all.

It’s like any other business. Obviously there will be more volatility in the beginning because it is something new that the market has not yet discovered how other participants are playing it, but then the IPO is just equity. If you believe in the long-term potential of this company, whether you list for the IPO, whether you do it in the first month of listing, you do it after three months. It is a long-term investment because it is the equity asset class.

Given the extent of the expansion we’ve seen in retail investment, especially during the pandemic, do you think that on the government side and the tax side, something could be done to make the environment a little softer?
This makes a lot of sense, especially for new investors. There is a scheme called the Equity Linked Savings Scheme – where investors can invest in ELSS-rated equity mutual funds. There is a three-year lock-up and these are run by some of the best fund companies. They can save tax up to that amount.

Equally, it is important for the government to realize that much of the activity is now shifting to demat format and that the number of demat accounts opened has more than tripled in the last three years. Three years ago there was a program called Rajiv Gandhi Equity Savings Scheme. Something like this would be very helpful in attracting new, first-time investors in particular to two things; one invests in the right set of stocks because, like the Rajiv Gandhi Equity Savings Scheme, the RGESS defined the universe of relatively low volatility, larger capitalization stocks to invest in and there was also a lock on that. So it does two things; this encourages the right behavior to stay invested for the long term and at the same time it is also from a choice of stocks that the portfolio is built which is also relatively larger and less volatile.

So, in terms of retail growth and investment, what are your expectations? for the coming year?
It will continue mainly for two reasons. The first is that this is an age-old trend and hasn’t grown despite the rally. Also as a country and economy we know that equity assets in general are severely underpenetrated and that had to change at some point and it’s not just happening because of the rally we’re seeing from March 2020 which increases every year. It will only continue because there is a strong undercurrent of Indians who want to start allocating to equities and it will continue organically.

In addition, looking ahead to next year, there are many IPOs waiting to hit the market and will also attract more and more people into the market. In terms of new participating accounts, it will depend on those two things. Of course, if the bullish rally continues like last year, it will only be an additional effect, but it is more of a longer-term, decade-long secular trend that we are seeing.

What are your prospects for 2022? It’s a bit complex at this point, I mean given that we have a new risk for Omicron growth, etc. that we saw last year. But looking ahead to 2022, if you were to give a secular perspective, what might it be?
As a platform, we can see a few things happening from a user perspective. One is going to be that people understand how to allocate their equity portfolio and that’s where, for example, passive products, direct indexing, index funds, BPAs will be increasingly important. It has obviously gained a lot of correction over the past two to three years, but even next year we expect that momentum to continue.

Secondly, it’s something that’s true for all financial services, but even more so for investing which we’re going to see unfold over the next year that investing is going to be increasingly social.

Just a few years ago, few people spoke openly about their personal finances or their investments. It started to change. From a secular perspective on markets and sectors, a trend is very clear that continues to play out and not just for next year. Every business will need to become a digital or technology business because the degrees of exposure or the degrees of importance to their business or the type of leverage they can add differ. For some it’s just being a catalyst and for some it could create capital, but technology as a theme will play out in the 2020s and after that as well.

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