Last week I received a really angry email. It was written in all capital letters without any punctuation so it managed to look angry even before I read it. The gist of this near-incoherent message was that I had neglected to inform the writer that stocks prices were going to fall. He wants me to come out "...WITH THE TRUTH AS TO WHY THE STOCK EXCHANGE HAS FALLEN FROM 22000 POINTS TO 12000 POINTS." Clearly, the writer is of the opinion that there is some secret reason as to why the stock markets fell and those who know this secret should have been considerate enough to share it with others.
I must point out that even though the literary style of this email is somewhat uncommon, the opinion expressed within is not. It's the standard Conspiracy Theory view of how the world works. From oil prices to 9/11 to stock markets, some of us seem pre-inclined to believe that secret cabals are manipulating the world. Curiously, we never seem to blame these shadowy conspirators when things are going well. I mean, I don't recall ever having received an email seeking"...THE TRUTH AS TO WHY THE STOCK EXCHANGE HAS RISEN FROM 2800 POINTS TO 22000 POINTS," even though that's the more fascinating question.
The interesting part is that the style of investing that I've always believed in would have shielded my correspondent from hardly having to bother about the stock markets' fall. If you had steadily invested Rs 10,000 a month in an average equity mutual fund over the last ten years, your investment would have been worth around Rs 65 lakh today. That's just Rs 12 lakh invested gradually at a comfortable rate. From the best to the worst equity mutual fund, the range runs from Rs 1.1 lakh to Rs 44 lakh. These correspond to an annualised rate of return of 42 per cent to 25 per cent.
At 8.5 per cent per annum, which is what you would have got from a risk-free investment like the post office, the Rs 10,000 a month for ten years would fetch you Rs 18 lakh. While it does seem that even the worst equity fund has been a lot better than any fixed income option, all equity-based investments require a calmer and more peaceable personality than my friend appears to have. The fund investment that would have grown Rs 10,000 a month to Rs 1.1 lakh in ten years was actually worth Rs 1.5 crore in January. So your money would have grown to Rs 1.5 crore in nine-and-half-years and then lost almost a third of it in just six months. That's the way equity investments are. Always have been, always will be.
Which is why there's only one way to use equity-based investments as a medium of savings. That is to do it gradually, cautiously and over a very long term. That money that you don't need for a decade is ideal for equity-based investments. And even then, as these last six months show you, a strong stomach is needed. Your returns may eventually work out to an average of 25 or 30 per cent per annum, but that doesn't mean that equity investments are a fixed deposit that will yield a predictable, straight line 25 per cent every year.
And as for conspiracies, the only one around is the one we hatch against ourselves by thinking short-term.