Share Market and an Ode to Doctors and Farmers

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According to a data by Association of Mutual Funds of India, the assets under management of the Mutual Fund industry has grown from 3.26 trillion rupees as on 31st March 2007, to 20.40 trillion rupees as on 30th September 2017, a six-fold increase in over 10 years. Tarun pays homage to farmers, who grow food for us and to doctors, for taking care of our health, in the weekly column, exclusively in Different Truths.

Share market…stock market…equity market. These are magic words in these times. While most people still consider this to be a gambling den, the resistance to the idea of share investing in India is slowly crumbling. This is borne out by the percentage increase in investments in India, in equity markets. Some statistics are as following: The equity investments as a percentage of GDP has grown from 4% in 2000 to 8% in 2017.

The number of people investing in mutual funds has grown to 5.8 crores, out of a working population of 48 crores.

The Mutual Fund to GDP ratio in a country like Australia is 114%, in the USA, it is 91%, and in the UK, it is 51%, so India can still increase the ratio a lot.

The growth rate of Fixed Deposits in India is around 15% annually, whereas, in equity markets, or mutual funds, it is, hold your breath, nearly 40% annually! According to a data by Association of Mutual Funds of India, the assets under management of the Mutual Fund industry has grown from 3.26 trillion rupees as on 31st March 2007, to 20.40 trillion rupees as on 30th September 2017, a six-fold increase in over 10 years. This trend is only expected to go up. I intend to write something about this.

Most people do not understand why markets go up, or down. There are many impressions for the same. Some believe markets have no real basis, and that operators make market moves to fleece the gullible player, that big corporates control the markets, or simply that the markets are random, and have no logic.

Let me define what I learned in my MBA, and my own experience. A big enterprise needs big funding. Even such a brilliant guy as Steve Jobs needed venture funding to launch his music products when he started Apple on a commercial basis. There are many methods of funding, namely loans, equity capital, venture capital, co-operative structure, owner funds, etc. Each has its own advantages and disadvantages. But it is generally believed that equity is an important part of the funding.

Equity pricing is not fixed. Equity stocks are traded on exchanges and are offering excellent liquidity. The pricing of equity changes on a daily basis. The price of a share is dependent upon the earnings growth of a company. However, it is also dependent upon the investible funds available in the economy. That is where speculative element enters, as the flow of money is a fickle thing, and can leave the equity counter as fast as it can enter. This is so because of the inherent nature of the equity, i.e., daily trading. Once the sentiment changes, liquidity flow changes. These liquidity flows are managed by highly paid professionals, who work based on certain statistical theories, and not on, so-called conspiratorial plans. The market is too big to be managed by a single individual, or entity, even as powerful as the government. Gone are the days of a Harshad Mehta, or Ketan Parekh, who could corner a market. This is so because of the sheer growth in numbers in terms of funds and market players.

But earnings growth is a stable number. Nature is normally stable, and growth-oriented. A tree grows, a river flows, the wind blows, the earth rotates, and so on and so forth. So, one element of stock markets remains same-that is earnings growth (with minor variations over the course of time). That is why, the markets always bounce back, even though there may be corrections because of change in sentiment. Now, there are some factors that determine earnings growth in various economies of the world, but that is a subject matter of a later article.

There is also another catch. Most of the professional fund managers underperform the benchmark indices, like Nifty. According to a report by UTI, more than 78% fund managers returned less than the index fund over a period of time. This could be due to lack of knowledge, or some kind of malpractices.

This information leads one to the fact that equity has a certain place in a portfolio of investments, but only after a careful consideration of one’s own risk profile, and asset allocation. Also, a simple index fund is much better than fancy mutual fund products or themes.

Unfortunately, stock markets also give rise to greed. They are used as a hope by those who are unable to do any other businesses. I myself have seen a phase of addiction to stock market trading. Mercifully, I managed to get over that by the grace of God.

I would say, the stock markets are a double-edged weapon. They are like fire, which is used to cook, but it can easily destroy as well. So, there needs to be a proper perspective to it.

Which brings me to the next part of my column, my ode to doctors, and farmers. While on a trip to Chakrata, I went on a trek to the beautiful Tiger Falls. The falls were exhilarating, but the trek through jungles and hilly terraces was itself very refreshing, though pleasantly tiring. While going through terraces, I saw farmers working on paddy plantations in small pieces of land afforded by the hilly terrain. Just ploughing and driving bullocks in waterlogged fields seemed a mind-boggling task to me. I thought to myself – here I am, an educated city dweller, yet I can’t raise my own food. I was almost reverential then to that farmer and farmers in general.

Recently, amid a very good spell in business and investment activity, I felt very sick. I was having a hard time even breathing. The doctor diagnosed me having high BP, and gave me an injection, and kept me for an overnight observation. I was discharged next day, but at that point of time, all I wanted was good health. I didn’t care about any of my investments, or business. I realised the very important role of a doctor in the society.

Now, equity markets, though serving an important function, are still nothing in comparison to what a doctor or farmer does. I pay my homage to both, even while I enhance my knowledge of financial markets.

What makes an equity market go up or down? I shall explain it in my next column.

©Tarun Gupta

Photos from the Internet

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Satyam Shivam Sundaram defines the belief and philosophy of Tarun Gupta, a Delhi-based businessman, with a passion for learning. He tries to locate the common thread in all learning – as Einstein identified energy as the base thing – and find creative, interdisciplinary solutions to problems, with special focus on economics. Behavioural economics is his special interest, which encompasses emotions as well as economic choices when identifying problems and the solutions.