“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.” – Peter Lynch

• Introduction
• Bulls versus Bears
• Returns in Bulls and Bears in India
• Conclusion

INTRODUCTION

When BJP came into power at the central government in India in May 2014, there was a lot of optimism about the changes they were expected to bring along. The stock markets have enjoyed a couple of great years since Feb 2016. Going up 15% in 2016 and 30% in 2017. After seeing such a great run, the current state of the market is looking a little gloomy, with mid-cap and small-cap stocks in a downward spiral. The current political scenario is looking uncertain as well with the elections coming up next summer. This has left the investors confused. There is only one question on everyone’s mind – Is this the right time to invest?

BULLS VERSUS BEARS

Stock markets are distinguished to be either in a state of a bull market or a bear market. A bull market typically follows a bear market and vice versa.

A bull market is a condition in the market where the stock prices are always rising up, encouraging buying of stocks. There is a sense of optimism in the market with a buoyant economy. There is no rule as to what percentage is considered a bull market but if the market returns are 20%+ annually, it can be considered a bull market.

A bear market is exactly the opposite. The stock prices are in a freefall, encouraging a selling market and a depression in the economy. There is pessimism in the market and heading towards a recession. Bears, like bulls, have no specific rule to be considered a bear market, but when there is steep decline in prices, more than 20% in a short span of time, about 3-6 months, it can be considered a bear market.

Bulls and bears are typically only recognized once they have happened.

RETURNS IN BULLS AND BEARS IN INDIA

One of the more recent bull runs in India, and a long one at that, lasting 56 months from May 2003 through to Jan 2008 saw markets giving a 622% absolute return which is a 50% CAGR over that time period. Let’s call this BULL 1

This bull run was followed by one of the worst bear runs seen in India due to a global recession that spared markets in no country. Period from Jan 2008 to March 2009 saw markets falling by 62%. More than half the value from stock markets was erased. Let’s call this BEAR 1.

Another bull run happened from December 2011 through to March 2015 which saw markets nearly doubling returns in 39 months which is a 22% CAGR. Let’s call this BULL 2.

This bull run was immediately followed by a bear market from March 2015 to Feb 2016 which saw markets falling by more than 23%. Let’s call this BEAR 2.

In the above graph, Jan 2000 SENSEX levels were at ~5,000 points. After a minor dip for three years (Bear phase), the 2003 levels of SENSEX were ~3,000 and from there onwards the BULL 1 took over, reaching ~19,000. Right after, in Jan 2008, we can see a dip which becomes steeper until Feb 2009, with SENSEX reaching ~8,900.

Another bull vs bear phase that is visible in this graph is the period from December 2011, where SENSEX levels are at ~16,000 mark. From here on for the next 3+ years, until March/April 2015, the SENSEX level is at ~29,000. This is the BULL 2 as described above. Right after, the SENSEX drops to ~23,000 in a matter of 11 months showing a 22% loss of market value.

Let’s assume investing in a Large Cap Equity fund in each of the above scenarios

Fund – HDFC EQUITY FUND

Investing in Bulls

If one had invested at the start of BULL 1 in May 2003, in HDFC Equity Fund, and remained invested till today, i.e. July 2018, they would have made 23.6% CAGR for the last 15 years!

Similarly, if one had invested at the start of BULL 2 in December 2011, in HDFC Equity Fund, and remained invested till today, they would have made 15% CAGR for the last 7 years which is a 2.5x multiple.

Investing in Bears

If one had invested at the start of BEAR 1 in Jan 2008, in HDFC Equity Fund, and remained invested till today, i.e. July 2018, they would have made 10% CAGR for the last 10 years which is a 2.7x multiple.

The investment goes through a recovery period to recover the 50% losses, which means the money has to double or give 100% returns to recover just the principle. And yet, staying invested in the fund for a significant time, the returns have been higher than a fixed deposit which are ~7-7.5%.

Similarly, let’s assume an investment made in BEAR 2 in March 2015 in HDFC Equity Fund. If they remained invested in the fund, till end January 2018, they would have made a 13% CAGR for that period and if they remained invested till July 2018, that CAGR drops to 6.67%. This shows us that in the last 6 months, the markets have gone through a bear phase.

CONCLUSION

The truth is that nobody can time the markets or tell when a bull phase starts or ends or when a bear phase starts or ends. It is only in hindsight that we know what has happened. Staying invested for a long time and selecting the right kind of mutual fund, shows that the power of compounding will do its job.

A conclusion we can make from this is that making investments at regular intervals will ensure we will make returns whatever the phase of the market we are in. It will also reduce our risk of making investments at just the top of the market levels and make sure that we invest even at market bottoms. There is no right or wrong time to invest in mutual funds and one should consult their independent financial advisor and decide on the best course of action.