Equity Investment In India: Right Time To Invest?

India's equity market is deep, liquid, mature, and well-diversified across sectors and company types, with strong domestic consumption, tech advancements, and a growing emphasis on manufacturing. The country's real GDP growth rate has averaged 6-7% annually over the past 20 years, higher than many developed and emerging markets. India's economy, policies, and technology make it an attractive investment destination.

The best time of day to trade is between 9:30 and 10:30 AM, as the volatility and volume of stocks traded tend to drop after the first 90 minutes of the market opening. The most favourable conditions for investing are when share prices are low, as there is a higher chance of subsequent price increases.

However, it is important to remember that equity markets are volatile by nature, and there are risks associated with investing in Indian equities, such as premium valuation and sensitivity to changes in interest rates.

The importance of investing early

Investing early is important for several reasons. Firstly, it gives you the flexibility to take risks and invest in high-reward financial instruments, such as equity, which can help grow your money at a quicker rate. You can then re-evaluate your portfolio as your financial responsibilities grow.

Secondly, the power of compounding means that the earlier you start, the more your investments will accumulate, and the better your chances of reaching your financial goals. Even small amounts invested early on can grow into a substantial corpus over time.

Thirdly, investing early helps secure your retirement. The longer your retirement funds have to grow, the higher they will be when the time comes to stop working. Additionally, a long investment horizon smooths out the effects of market fluctuations.

Finally, investing early can provide tax benefits. In India, for example, ULIP premiums are eligible for deductions of up to ₹1.5 lakh from your taxable income under Section 80C of the Income Tax Act, 1961.

The pros and cons of investing in equity mutual funds

Investing in equity mutual funds in India can be a great way to gain exposure to a wide variety of assets without having to purchase individual securities. Here are the pros and cons to help you decide if and when to invest:

Pros of Investing in Equity Mutual Funds

• Professional Management: Mutual funds are managed by full-time professionals with the expertise, experience and resources to actively buy, sell and monitor investments. They continuously monitor investments and rebalance the portfolio to meet the scheme's objectives.
• Risk Diversification: Investing in mutual funds is an easy way to diversify your investments across many securities and asset categories such as equity, debt and gold. This helps to spread the risk so that you are not overly exposed to any one investment.
• Affordability and Convenience: Mutual funds are affordable for many investors as the minimum initial investments are typically lower than purchasing individual securities. They are also convenient as they are easy to buy and understand, with low minimum investments.
• Liquidity: Open-ended mutual fund schemes can be easily redeemed (liquidated) on any business day, giving you easy access to your money.
• Low Cost: Mutual funds have low expense ratios due to huge economies of scale.
• Well-Regulated: In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which has strict rules and regulations in place to protect investors, ensure transparency and fair valuation principles.
• Tax Benefits: In India, investments in certain types of mutual funds qualify for tax benefits.

Cons of Investing in Equity Mutual Funds

• Fees: Investors have to pay fees to cover the fund's operating expenses and the salaries of the professionals managing it. These fees can include high expense ratios and sales charges, which can reduce overall investment returns.
• Tax Inefficiency: Mutual funds may distribute gains that are an uncontrollable tax event for investors.
• Poor Trade Execution: Mutual funds are traded only once per day, which may not be ideal for investors looking for faster execution times.
• Management Abuses: There is a risk of management abusing their authority, such as through unnecessary trading, excessive replacement of stocks, or selling losers before quarter-end to fix the books.

While there are advantages and disadvantages to investing in equity mutual funds, it is important to remember that no investment is risk-free. The key is to do your research, understand your budget, timeline and profit goals, and make informed decisions that align with your investment objectives and risk tolerance.

How to determine your risk appetite

When it comes to investing in equity in India, or anywhere else for that matter, determining your risk appetite is crucial. Your risk appetite refers to the amount of financial risk you're comfortable taking on. Here are some factors to consider when determining your risk appetite:

Investment Goals

Understanding your short-term and long-term financial goals is essential. Are you investing for retirement? Do you have a specific target amount in mind? Knowing your investment goals will help you assess how much risk you are willing to take. For example, if you are investing for the long term, you may be able to tolerate higher risk investments as you have more time to recover from potential losses.

Risk Tolerance

How do you feel about risk? Are you comfortable with market fluctuations, or do you find it stressful? If you are someone who gets anxious about market volatility and tends to make impulsive decisions, you may have a lower risk tolerance. On the other hand, if you are comfortable with risk and market ups and downs, you may have a higher risk tolerance.

Age and Life Stage

Your age and life stage play a crucial role in determining your risk appetite. If you are younger, you may have a longer investment timeframe and be more comfortable taking on riskier investments. As you get closer to retirement, you may want to adopt a more conservative approach to preserve your capital.

Personality

Your personality can also influence your risk appetite. Some people are naturally more comfortable with uncertainty and taking calculated risks, while others prefer a more cautious approach. Consider your personality traits and how you typically navigate uncertainty when determining your risk appetite.

Financial Situation

Your current financial situation, including your income, expenses, and any debts, will impact your risk appetite. If you have a stable financial situation and a cushion to fall back on, you may feel more comfortable taking on riskier investments. On the other hand, if your financial situation is tight, you may want to opt for more conservative investments.

Diversification

Diversification is a strategy that can help manage risk. By spreading your investments across different asset classes, industries, and sectors, you can reduce the impact of any single investment loss. Diversification can be a way to mitigate risk while still investing in riskier assets.

Remember, there is no one-size-fits-all approach to determining your risk appetite. It is a personal assessment that depends on various factors. It's important to carefully consider your financial situation, goals, and comfort level with risk before investing.

The role of the Indian government in creating favourable economic conditions

Investor-Friendly Policies:

• The Indian government has implemented investor-friendly policies, including a favourable Foreign Direct Investment (FDI) policy. Most sectors are open to 100% FDI under the automatic route, and the policy is reviewed regularly to maintain India's attractiveness to investors.
• The government has also introduced the Foreign Investment Facilitation Portal (FIFP), a single-point interface to facilitate and approve FDI proposals.
• The National Monetization Pipeline (NMP) was launched to provide a comprehensive view of investment avenues in infrastructure.
• The government has taken steps to streamline labour laws and make it easier to do business, notifying four labour codes to condense and rationalize relevant provisions.

Infrastructure Development:

• The government has made significant infrastructure investments, including in highways, metro systems, airports, and renewable energy projects.
• The National Logistics Policy (NLP) aims to reduce logistics costs and improve efficiency, enhancing India's competitiveness in the global market.
• The government has also introduced the India Industrial Land Bank (IILB), a GIS-based portal providing information on industrial infrastructure to support businesses.

Production-Linked Incentives (PLI):

• The government has introduced PLI schemes in multiple sectors, such as automobiles, advanced chemistry cell batteries, and renewable energy, providing significant incentives to boost manufacturing.
• These schemes are expected to lead to additional production of Rs. 30 lakh crore and create employment for 60 lakh people over five years.

Ease of Doing Business:

• India has risen in the World Bank's Ease of Doing Business rankings, reflecting the government's efforts to simplify processes and reduce compliance burdens.
• The introduction of the Goods and Services Tax (GST) and improvements to the business environment have been notable contributors to this progress.
• The government has also established the Business Reforms Action Plan, ranking states based on the implementation of reform parameters to streamline rules and procedures.

Financial Sector Initiatives:

• The Reserve Bank of India (RBI) has taken actions to increase foreign exchange inflows, such as exempting certain deposits from reserve requirements and increasing limits for external commercial borrowings.
• The government has extended a concessional tax rate of 15% to new domestic manufacturing units until March 31, 2024, providing tax incentives.
• The mutual fund industry has experienced consistent growth, with assets under management (AUM) rising. The government aims to further boost this sector.

Support for Domestic Companies:

• The concept of 'Make in India' and the Aatmanirbhar Bharat initiative provide incentives for domestic companies to increase production and create new capacities.
• The government has introduced Phased Manufacturing Programmes (PMP) to promote domestic manufacturing in sectors like electric vehicles.
• The government has also provided financial incentives to companies in sectors like textiles under its production-linked incentive schemes.

The impact of geopolitical shifts on India's equity market

Geopolitical shifts can have a profound impact on global trade and investment landscapes, and India is no exception. Here are some key ways in which geopolitical shifts can influence India's equity market:

• Rising Power Dynamics: As an emerging economic powerhouse, India's rapid economic growth, burgeoning middle class, and technological advancements are reshaping global trade dynamics and challenging the established order. This shift in power dynamics has led to a realignment of global economic structures, with India attracting foreign investment and enhancing its trade profile.
• Regional Conflicts: Regional conflicts, such as tensions in the Middle East and Eastern Europe, can have economic implications for India. For example, the conflict in Ukraine has disrupted global supply chains and affected the availability and prices of commodities, including agricultural products and metals. India's proximity to these regions may result in indirect economic impacts.
• Shifting Alliances and Trade Agreements: The formation and reformation of trade alliances can significantly influence India's equity market. For instance, initiatives like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the African Continental Free Trade Area (AfCFTA) create new economic blocs, reshape trade routes, and redefine partnerships. India's position within these shifting alliances can impact its access to markets and resources.
• Impact on Global Investment Patterns: Geopolitical shifts influence global investment patterns, and India is no exception. Foreign direct investment (FDI) flows into India may be affected by rising tensions between major powers, such as the US and China. Additionally, India's investment climate may be impacted by sanctions, trade wars, and changes in regulatory environments.
• Domestic Political Landscape: India's domestic political landscape can also play a role in the impact of geopolitical shifts on its equity market. For example, policies and regulations introduced by the Indian government in response to external geopolitical events can influence investment decisions and market sentiment.
• Commodity Prices and Energy Security: Geopolitical shifts can affect commodity prices, including oil and gas, which are crucial for India's energy security and economic growth. Volatility in energy markets, such as disruptions to global energy supply chains, can impact India's equity market, particularly in sectors heavily dependent on energy inputs.
• Global Economic Slowdown: Geopolitical tensions and conflicts can contribute to a global economic slowdown, reducing demand for Indian exports and impacting the country's trade balance. This, in turn, can have a ripple effect on India's equity market, particularly for companies heavily reliant on international trade.
• Opportunities for Diversification: Geopolitical shifts can also create opportunities for India to diversify its trade and investment partnerships. For instance, India may seek to strengthen economic ties with countries outside traditional alliances, opening up new markets and reducing overreliance on specific regions.
• Impact on Specific Sectors: Certain sectors of India's economy may be more vulnerable to geopolitical shifts than others. For example, the technology and telecommunications sectors often face regulatory actions and supply chain disruptions due to security concerns and geopolitical rivalries. This can impact India's equity market, particularly for companies operating in these sectors.

In conclusion, geopolitical shifts can have far-reaching implications for India's equity market, influencing investment flows, trade patterns, sector-specific impacts, and overall market sentiment. While there are risks associated with geopolitical shifts, there are also opportunities for growth and diversification. Investors and businesses must carefully navigate these complexities to make informed decisions and adapt their strategies accordingly.

Frequently asked questions