The COVID-19 crisis has led to a huge spike in new investors, in some cases, for the first time in their lives. Major brokerage houses in the country have seen a surge in new account openings. India alone has seen 1.8 million new accounts opened since March. New investors who do not have much background in equities, jumped at the opportunity presented by COVID to start portfolios firstly with services or products they know and use.
Discount brokerages have reported the sharpest surge in new accounts, with Zerodha leading the way. The reported average age of new investors during the same period was reported to be 30, with the average ticket size being Rs 80,000. With investors coming in to buy large-cap blue-chip stocks when Nifty was at 8000-9000 levels, they have seen substantial returns during the period.
While the flocking of new age investors is great for the democratization of the stock market, if you don’t know what you are doing, it’s almost gambling. It’s very speculative and you can experience quick run-ups and rundowns. The timing of the investors though has been spot-on, with investments made during the lows of the market.
The recent crash in the market led to prices dropping by huge margins due to decoupling of the price from operational performance of the underlying company. With markets having vastly pulled back from lows to the tune of 46.6% for the Nifty 50 index, we will slowly consolidate to levels that will not see such frequent meteoric rises.
While some or many industries may have seen uptick in performance in the first quarter of 2020 such as Agro, Gas distribution, Pharma, Software…, the vast majority of companies in the NSE will start to show real impact seen due to COVID when results start pouring out.
So, a naïve investor, previously invested in companies that were trading at levels perceived not to be in line with the operational performance found the valuations to be cheap. Now, with the situation reversed, wherein operational performance will have seen a dent in numbers should also be deemed as expensive by the same investor which is rarely the case.
Inexperienced investors tend to stick with these companies only comparing current price with their cost price but not factoring opportunity loss incurred due to non-investment in another growing company into the picture. If the chosen company too had fallen into the category of slowing of performance in the quarter due to COVID, the price too will reflect the same sentiment and investors stand to lose heavily
WHAT CAN I DO TO AVOID THIS?
It is very important for a casual investor to understand what a fair price for a particular stock is. As in real life, we can only determine if a particular commodity is cheap or expensive by comparing its actual price with our perceived fair value for the same. The simple principle applies directly to stocks.
Now, comes the task of being able to assign a fair value to a stock. This is a vast field with many numerous theories and principles behind assigning a fair value to stocks. For a novice investor who has very little experience in delving into quarterly results issued by companies on their performance and adjudicating which entries need to be weighted and used to get to a fair value, this is a very daunting task.
This is where embarking on a journey to understand the fundamentals of the company and the role that the results have on future projections sets retail investors apart from educated and seasoned investors. On the other hand, this is also where financial professionals and products come into the picture.
Investors hoping to get exposure into equities but are okay with relying completely on the discretion of a fund manager look to Mutual funds. Investors though, have to be prepared to absorb all the costs associated with MF’s such as their distribution commission, fund manager fees as well as a bunch of overall operating expenses which are directly passed on to them. These costs are also passed on to the investor regardless of performance of the Mutual Fund. Most importantly, investors are always left in the dark about the securities held by the fund and the rationale for choosing one company over the other as holdings are only disclosed once a month. Thus, investors are never allowed to learn the subject for themselves.
Investors with very large ticket sizes have the option to opt for PMS (Portfolio Management Service). With investments of Rs 50 lakhs as minimum, investors can transfer control of selection and execution to a PMS who acts on behalf of the investor. This mode of investment allows better insight into reasoning behind selection of stocks and entry/exit prices for them. The only caveat being the very high entry barrier and the multiple costs associated which vary from PMS to PMS.
It is only now that more and more retail investors are taking the input of Investment advisors. With no limits on minimum investment and complete authority of execution always residing with the client, this mode of investing allows investors to get direct exposure into selection, entry and exit of stocks and reasons for doing so. SEBI Registered Investment Advisors (RIA) are the ideal option to allow investors to start learning about the process of investing from experts while still being able to reap the rewards of equities. Most investment advisors only charge a small fee as maintenance and reserve majority of the other fees relative to the performance. So, they make money only if you make money.
Choosing the right option is paramount for an investor to realize their financial goals. Choose wisely!!