For NRIs, investing in the Indian market is akin to bungee jumping — considering what has happened over the past few weeks.
Starting off at a very high level of 12,612 on May 10, the Bombay Stock Exchange Index, or Sensex, took a deep dive of 1,100 points on Maniac Monday -- May 22 -- as it stretched to its limit but the elastic cord of the sound Indian economy tied to the investor bounced it back to lose 456 points.
On May 18, the Sensex was down 1,300 points. Again, the Sensex swooshed down but regained soon. The upward movement happened quickly but has not reached the same peak. By June 16, the Sensex had topped the 10,000 mark, closing at 9,885 -- gaining 955 points in two days.
The big question that surges through the head of the bungee jumper as he swooshes up and down is: "Will I survive?" As the stock market crashed, it was the same question for the Indian economy to take the slack and bounce.
The short answer is 'Yes'. Although tied to the world economy, the Indian economy is on the road to rapid sustainable growth. Foreign institutional investors have pumped in over $40 billion into the Indian market and when the US interest rates go up or some other global economic activity affects them, they withdraw their funds -- but not all of them. Why - because they are sure about India's medium term growth.
The NRIs are sending over $20 billion to India annually and may be double this figure if we add the unofficial transfers. India's foreign exchange reserves stand at $163 billion and other economic indicators are positive.
Rising interest rates and oil prices that slow down the world economy can reduce the profits of Indian companies from a hefty 30 per cent to 15 per cent but even half that figure makes attractive investment in their stocks.
At that rate, profits double in five years and double again in the next five years. The Sensex stood at 2,900 in April 2003 and quadrupled to 12,600 in three years, the latest 'bungee fall' notwithstanding.
In 10 or more years, equities have beaten every other asset class for high returns. However, they are also the most risky.
So the primary quality of the investor should be patience during the upheavals. An analysis of Sensex data by AbunDanze, a financial planning firm, proves the value of patience over a long run of 10 years.
This analysis of the Sensex data over 1979-2006 clearly shows that stupendous returns in some years average out negative returns in other years.
Over any one-year rolling period, the Sensex posted negative returns 10 out of 27 times but nil over any 15-year period.
Risk (the capacity to incur a loss) loses its potency over longer periods. For example, when we analyse the Sensex over the last 25 years, the probability of incurring a loss in any given year is 37 per cent.
This probability decreases to 20 per cent over any three-year period, 13 per cent over any five-year period, 5.5 per cent over any 10-year period and zero over any 15-year period.
Why has the market recovered so rapidly? Simple, because the smart investors are entering the market at these low prices.
One NRI investor is holding on for the Sensex to touch 8,000. He may never get that trough. It's not about timing the market but the time you stay invested in the market.