10 Lakh Crores of Investor wealth lost after the Budget 2018. Really??

After the 2018 budget, the rising stock market went into correction mode. This long-awaited correction was triggered by the budget proposal to re-introduce Long-Term Capital Gains tax.

Media frenzy created fear and confusion in the minds of retail investors, resulting in panic selling. In parallel, global events like the Russian elections and Saudi Aramco IPO, the world’s largest IPO, supported the fall. Now crude oil prices need to stay at high levels for both these events to sail through. This worry took the markets further down, so more sell-off is likely.

Now the media says 10 lakh crores of investor wealth is lost in 5 days. This fuels the fears of the already confused investors. Is it true that so much wealth was actually lost? If so, who made the gains?

In the stock markets, when there is a higher value on a company’s stocks or the index, it is true that the whole asset is valued at that price. If all the owners offer to sell at the highest price, there is zero possibility that everyone will get that price. As sell offers pour in, supply increases and price declines. Price decline continues till the supply slows down and demand increases. Then the price starts to move up again. If the sentiment becomes stronger and builds more confidence, then the market moves past the previous high leading to an even higher value for the total asset.

Wealth gets created because of the confidence people have in the company or the economy. Wealth gets eroded when many of them conclude that their expectations are met and begin to move out.

So, only if we sell and move out of the investment can we lock the high price. If a person is waiting without participating in selling and realizing the gains, it means his confidence level is high, and he wants to achieve an even higher price.

Just calling out the highest level reached, not taking the action to exit and saying wealth is lost when prices move down does not have a meaning. The reason why you did not sell was that your confidence in the company or economy continues to be strong. If it remains strong, be invested to exit at a higher price.

The other approach is flawed wherein you stay invested when the market is moving up and when prices decline due to selling by others, you get worried and take a decision to sell at the available price. At this stage complaining that you lost your wealth is not the right way to approach this asset.

If you are participating in the stock market with commitment and confidence, hold on till suitable conditions prevail. If the situation changes and shakes your confidence, then take a stand to move out either with available profits or even at a loss. Again, you need to understand the conditions and take action.

In reality, wealth is not lost. It was only a notional value. When a group of investors decides to move out, the prices drop bringing down the notional value. At all times we will have some set of investors wanting to exit for various reasons and that is market dynamics.

Be invested as long as your confidence in the stock or the market is intact. Exit when your goal is reached, or the conditions change, altering your view and confidence levels. Once we are investing with this clarity, ups and downs in the market will not disturb us or make us take a decision midway to exit.

So, when markets come down in value, no one loses any physical money, it is only the notional value that comes down. Stay invested with your confidence and objective and you will get rewarded adequately.

Lower inflation will cap income from debt investments

India’s developments have become visible in all areas of economic activity. For a very long time, I remember in my school days, teachers used to say that, inflation in our country is high which posses a big challenge to save money. Slowly this challenge is becoming a myth, we have successfully brought down the inflation rates to below 4% levels.

When Raghuram Rajan talked about this a couple of years back, media brushed aside saying that, it is not going to be easy. Now, as we have reached the goal and beyond, we are looking at a newer challenge. When inflation is low and bank rates are high, real return in the economy is also high. This brings the challenge of having to pay higher taxes on income earned from debt investments which qualify for indexation benefits as well as assets like Real Estate.

In 2014, the debt returns were at 8.7% and tax payable was NIL after indexation. In 2017, the returns is almost the same, where the taxable portion of the income has moved up to ₹15742. Which means more than 50% of the returns will be taxed at 20%, thereby bringing down the net returns by more than 10%.

It is interesting to note how new challenges are coming up in life. If inflation stays low and the bank rate does not come down, taxes on debt fund returns will go up making the net gains reasonably lower. Investors in debt funds will have to re-think their investments.

They will also look to Equity funds which is already getting over crowded. Presently running at about 6 lakh crores and with expectations that there is going to be big inflows due to poor FD returns. Fund managers will now have a bigger challenge on stock selection and allocation of funds.

As it is MF’s are holding cash to the maximum permissible limits, presently a scheme can hold 10% cash. When holding cash in anticipation of a correction, if the market keeps moving higher, all these funds or schemes will have under performance against the broad markets. To avoid investors wrath, fund managers will be forced to invest into stocks that are fundamentally poor, thereby attracting very high risk on the investments.

If markets change course, the retail money that has flocked the Indian Mutual Fund industry will begin to move out, again giving the next challenge of meeting redemption pressures.

As the returns from debt funds are going to become lower due to taxes, what can be the next best alternative. Arbitrage funds will be the next place where we will see high inflows. Arbitrage funds are giving returns that are about equal to the prevailing bank rates for Fixed maturities, the biggest advantage they have is the tax free status or Equity taxation status.

Whereas, Arbitrage cannot absorb big flows as the edge to get returns will move away with huge capital chasing the same instruments in the market, which will bring down returns. As every other door to big returns will get locked as an automatic process, investors will be facing a situation of having surplus liquidity and not knowing what to do with it.

Bank rates coming down or inflation moving up is a requirement to keep things as they are, even this condition will require that, the fund flows into the mutual fund market requires a slowdown. All of a sudden the whole country put all their savings into one asset class will for sure ensure that the asset collapses on its own weight. Beyond our inflows, foreign money is also chasing Indian markets big time. FPI limit of 51b$ has got exhausted as I write this article and RBI is thinking to open another 2b$ for FPI’s.

One more change that could come is the returns on debt funds will begin to decline, which is inevitable & get self adjusted.

Investors beware, quality of your investment needs to looked at on highest priority. Just going to a website and selecting the top ranked fund will no more give the best returns. People need to take help of advisers while doing their investments. soon, we will have analysts who will research and find good Mutual Fund Schemes for investments.