As of January 29, the Nifty 500 Total Returns Index, which is a good representation of the broader Indian stock market, had fallen by 13% from its peak achieved on September 26, 2024. A total returns index, while calculating returns, factors in the dividends distributed by the companies that make up an index. (All returns calculations are as of January 29, 2025).
Now, taking into account the history of extreme falls in the Indian stock market, a 13% fall over a period of slightly more than four months, isn’t really a huge one. So, why is there a reasonable amount of panic going around amongst retail investors? For anyone looking to stay invested in the stock market for a long-term needs to understand the answer to this question. Indeed, the stock market as it does every few years is teaching old investing lessons to a new set of retail investors.
Here are these lessons:
First, a large number of investors who are currently a part of the stock market have been around only for a few years. A bulk of the demat accounts currently in existence were opened only after March 2020. As of March 2020, the total number of demat accounts stood at around 4.1 crore. By December 2024, this had jumped to 18.5 crore. This basically implies that around 78% of the demat accounts or around four in five demat accounts have been in existence for less than 5 years. And in these five years, the stock market has only gone one way, that’s up. These new investors have no experience of the stock market going down. Which explains their panic. So, just because you haven’t experienced something in the stock market, doesn’t mean that it won’t happen. Markets can go up. Markets can go down. Of course, predicting this with utmost certainty is impossible. That’s lesson number one.
Second, a 13% fall in the broader market doesn’t tell us the complete story. Specific sectors on which narratives were created and on which retail investors bet big time have fallen much more. Let’s take the case of the government-owned public sector enterprises (PSEs), which were a highly narrativized sector in the last few years. The Nifty PSE Total Returns Index which comprises 20 PSEs has fallen by around 24% from its high on August 1, 2024. There are other narrativized sectors which have fallen even more. A lot of retail investors have burnt their hands by investing in these sectors. This tells us that high risk doesn’t always mean high returns. The relationship works in an inverse way as well which is why the word ‘risk’ is used with the word ‘return’. That’s lesson number two.
Third, and this is my favourite one. Finfluencers have taken many newbie retail investors for a ride and that’s becoming clearer with every day that goes by. This is kind of a hurt that will perhaps take a lifetime to heal. It’s like a breakup. A messy one. And some breakups don’t heal. This tells us that just because someone can make good reels saying things that you want to hear doesn’t mean that they have any expertise in that area. That’s lesson number three.
Fourth, this time it’s different, is just a good marketing slogan. It never really is very different because the stock market goes through cycles. As valuations go out of whack, it just seems different, until it doesn’t. That’s lesson number four.
Fifth, the narrative that many finfluencers sold about fixed deposits being rubbish investments was basically rubbish. Of course, this doesn’t mean that 100% of savings should be invested in fixed deposits. Not at all. But investing a reasonable proportion of your savings into fixed deposits is always a good idea because return of investment is more important than return on investment or that in times like these you realise that investments in fixed deposits help you sleep well at night. And nothing can be possibly more important than that. That’s lesson number five.
Sixth, in situations like the current one, the importance of diversification comes out all over again. In recent years, many finfluencers and people who make a living by saying what seem like interesting things about investing, have often quoted a hedge fund manager called Stanley Druckenmiller as saying: “Put all your eggs in one basket and watch it very carefully.” Or that diversification is not important when it comes to investing.
Now, this might be a good principle to follow for those who are as smart as Druckenmiller is, have been in the market as long as he has and have seen several stock market cycles. But most of us do not fall into this elite category.
We have our daily worries to take care of. To handle toxic bosses. Figure out the next holiday plans. Go for a parents-teachers meeting on Saturday. Order a takeaway from Zomato. Take into account what our spouses, partners, children, and parents are thinking at any point of time. Basically, handle the mundane of everyday living, which leaves us with very little time to concentrate fully and hard on investing our savings. So, we need to diversify our investments. It’s actually as simple as that.
In the Indian context, investors who bet on narrativized stocks and sectors in the last few years, and held concentrated portfolios, have lost out much more. Those who invested in equity mutual funds (not sectoral ones but broad-based ones) are in a better situation, implying that the cliché of not putting all eggs in one basket is the most important investing principle. It may not seem important at certain points of time but that doesn’t mean it isn’t. That’s lesson number six. The final lesson and the most important one.
 (1) (3).jpg)
