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Change your investing habit and create wealth

27 May 2016

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The Indian stock market has generated enormous return during the last two decades. Unfortunately very few retail investors have benefited from this boom. The main reason behind this is the proportion of retail investors in Indian equity markets is very low. The active retail participants in Indian stock market are relatively 1.5 Percent of the population where as in markets such as US and China, it is 18% and 10% respectively. This is a very bad news as far as our country’s economic landscape is concerned. Business plays an important role in the growth of any country’s economy. The quality businesses which generate positive cash flow have added tremendous growth to our country’s GDP. But the retail investors who actually benefited from this are very low.

Our country needs to channel more of its household savings in to equities. At one level, the reluctance of retail investors to invest in to equities doesn’t make sense. Take a look at Sensex, despite the normal ups and downs the index has generated multi fold return over the past twenty years. The index has rallied from 3000 level back in 1995 to 27000 in 2015. This is more than investors earned from their preferred mode of financial modes like fixed deposits. Over these years, most of the wealth from this rally has been created by foreign institutions rather than the retail investors. Retail participants were stood as by standers or traders who didn’t have the discipline to invest in or stay invested in equities.

So what accounted to miss this opportunity to earn reasonable return from markets? The answer is that, the average retail investors don’t make the best buy and sell decisions. They always sell the high performing stock earlier than they should and hold bad performing ones too long. Moreover, they also tend to enter in to the markets when it is trading in high, and quickly lose their confidence when the markets fall.

The importance of equities points out when we realize that the inflation destroys most of the earnings generated through investing in fixed schemes. Unfortunately, we only invest our savings to fixed investments schemes and other physical assets like gold and real estate. This is the investment habit we have been following for a long period of time, and this is the kind of mindset we have to change.

We have to develop a culture to start invest in successful businesses which add value to the economy as well as create wealth to the investors. Only then the retail investors can reap the benefits along with growth in the economy in the future.

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