India’s stock markets collapsed after the onset of the pandemic last year, with the Nifty 50 plunging 60 percent to 7,600 levels in March 2020 from a peak of 12,200. That resulted in panic, fear, portfolio losses and general despair.
A year later, the picture is a lot different. The Nifty 50 has recovered all the losses and is scaling fresh highs. There has also been unprecedented levels of retail investment in shares, buoyed by the market exuberance.
So, did everyone make money with this big swing in the market? Not necessarily.
Savvy investors stayed invested in equities as per their asset allocation through the pandemic and market volatility, while retail investors pulled the plug.
According to data from the Association of Mutual Funds in India, risk aversion started right after the March lows, when investors began pulling money out of equities. The July 2020 to February 2021 period marked eight months of straight outflows – investors who were not in equity by February or March 2021 had no hope of riding the rebound and attempted a catch-up only by July.
The lesson here is that it’s important for investors not to get emotional during volatile markets and that asset allocation remains the most important decision during the pandemic year.
“Individuals do not necessarily act rationally and consider all available information in the decision-making process because they may be influenced by behavioural biases and these biases lead to sub-optimal decisions,” said Prableen Bajpai, founder of FinFix Research and Analytics, a financial research and wealth management firm. “Loss aversion is a strong driver which can lead to portfolios which are too conservative.”
There were pockets that retained their conviction in equity allocation and they managed to come out unscathed.
Looking at the asset mix across categories like banks and national distributors that manage over Rs 10,000 crore of assets, quite a few stars emerge.
Axis Bank, which had 67 percent in equities in March, and ICICI Securities with 65 percent equity allocation stand out among the banks.
Among the top B2C-focused national distributors, Anand Rathi Wealth with almost 66 percent of its assets in equities got this bull run right.
Kirtan A Shah, cofounder of SRE Wealth, also emphasised the importance of curbing emotional impulses.
“The biggest advantage of asset allocation is in its ability to curtail behavioral bias and the urge to time the market. It also helps reduce risk and optimise returns.”
A recent study by the India unit of US financial services firm Morningstar attests to the importance of staying invested.
From March 2011 to February 2021, Indian stocks owed all their outperformance over cash to just eight months, or 6.7 percent, of all months, making it near impossible to time the market.
Clearly, asset allocation through ‘time in the market’ once again trumps ‘timing the market.’