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End of 2016; End of HD currency!! An opportunity


DeMonetisation – A Bold Move

 As everyone is well aware about the 8/8 DeMonetisation move by our Prime Minister, which is making headlines every day in newspaper, it still remains to be seen whether the step achieved its objective or not. Well there are people who believes that it has been a failure and the other side believes it will prove to be successful.

We believe, while it has created fear for sure in many, but it is still just a beginning of a clean-up activity whereby somehow people have managed their funds to be deposited in the banking system; it nowhere ensures stoppage of regeneration of black money.  So what steps government is planning to take in future; like how it raids people managing their black money, reducing the tax slabs or discouraging cash transactions will determine the successfulness of the DeMonetisation.

 

DeMonetisation – An Opportunity for Capital Market Investments?

 Well, in the meantime, how does an investor see DeMonetisation as an investment opportunity?  The money that was lying somewhere in the house has been put in banking system and now one more avenue had opened up for them i.e. financial asset (which was till now primarily restricted to Gold/Real Estate).


Currently, 70% of household savings in India are in physical assets – primarily gold and real estate; while financial assets (like FDs, MFs, equity, bonds, insurance funds etc.), account for only a third of overall household assets in India.

 So there is an overall gross belief that this will be a big booster for the capital markets and a great opportunity as well.


 Yes! We equally agree to that considering the following factors:


Access to banking: It will increase the exposure towards financial assets

Youth: Majority of our population which is youth is more likely to be tilted towards financial assets than the conventional asset class

Utilisation of cash: It is anticipated that part of the huge cash which is deposited is likely to remain available and is likely to be deployed in capital market looking at reducing rate scenario and unattractiveness of Real Estate and Gold growth story.

 

When it comes to returns, there is an undoubted evidences available to prove that Equity is the King amongst asset classes; below table proves that and the same thing holds true when people think of RISK (Although we believe otherwise) !!

                                                                                      

Asset Class

CAGR (%)

Investment of `10 lakh

5 years

10 years

5 years

10 years

Sensex

6.45

12.68

13.67 lakhs

33.00 lakhs

Gold

3.43

11.93

11.84 lakhs

30.86 lakhs

Real Estate

4.30

7.84

12.34 lakhs

21.27 lakhs

Bank FD

4.49

5.87

12.46 lakhs

17.69 lakhs

Data as on December 31, 2015 *Conditions Apply

 

 Meaning, although it’s a risky asset class, we believe it is indeed an opportunity for investors to generate good returns from the volatility created by DeMonetisation. However, Conditions Apply!

 When people discover they are no good at baseball or hockey, they put away their bats and their skates and they take up amateur golf or stamp collecting or gardening. But when people discover they are no good at picking stocks, they are likely to continue to do it anyway - Peter Lynch

From the above quote it appears that it is very difficult, but we believe that the trend is changing and you can also change your behaviour from traditional methods of investing and avoid the following general mistakes which an investor makes in such kind of environment.

 

  • Don’t invest purely because Sensex / Nifty is (falling). Don’t focus on index; Be stock specific.
  • Don’t follow the trend i.e. Buying/Selling particular sector’s stocks because that sector is going to be benefitted/ impacted owing to DeMonetisation. See whether the stock in that sector is fundamentally sound and valuations are fair.
  • Don’t invest with a view to make profit in 3-6 months and make an exit.
  •  Don’t invest based on Tips and Rumours; Do your own research or seek professional advice.

 There is simple principle that is sighted by this quote by Mr. Peter Lynch “Behind every stock there is company, find out what it’s doing. We believe all the mistakes sighted are primarily because people forget about the company and fall in the trap of price chart or general sentiment.

 However, most investors don’t get enough time out from their businesses or jobs to study about the company and get trapped either holding on loss making stocks or booking profits too early. So they feel Equity is KING even when it comes to RISK!

 

Conclusion:

Investing in high quality business (stock) at the right price and holding them for a reasonable period is the only way for wealth creation.

So study the stocks before investing and if you do not have time/knowledge; then seek professional advice. Be it Portfolio Manager or Mutual Fund. Because “Amateurs focus on rewards. Professionals focus on risk

We wish all of you a Happy New Year and have a great 2017 !!

Happy Investing !!

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