Beating the index has been too easy this year, almost | Mint

Beating the index has been too easy this year, almost

Experts are worried that the rally will instil a false sense of confidence, particularly in new investors.
Experts are worried that the rally will instil a false sense of confidence, particularly in new investors.

Summary

  • A market rally over the last six months has pushed up valuation of small-, mid-caps significantly

New Delhi: Should you invest directly in stocks or opt for mutual funds? How about just going passive and buying the index through an exchange traded fund (ETF)? Even as investors ponder over these questions in the wake of a market rally over the past six months that boosted small- and mid-caps and pushed up portfolio values, experts have advised caution. The market rally may instil a false sense of confidence in many investors, some experts warn.

The 2023 rally has been broad-based, with a large number of stocks outperforming the index. The Nifty delivered 9.9% in the period from April to October 2023 but a large number of mid- and small-caps have beaten its retirms. QED Capital Advisors LLP’s study on Nifty 500 stocks from 2019 to 2023 (April to October) further sheds light on this dynamic. It looked at the percentage of stocks delivering more than 12% in this period each year for the past five years among the Nifty 500. About 25% of stocks rose more than 12% in 2019. This rose to an astonishing 83% in 2020 and 69% in 2021 as the market rebounded from the covid pandemic.

(Graphic: Mint)
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(Graphic: Mint)

The market saw a correction in 2022 and the percentage of stocks crossing this threshold in April-Oct of that year fell to 36%. This year, the ratio is up again, at 71%. To mitigate the impact of survivorship bias, the study considered returns for 414 stocks consistently present in the index (Nifty 500) throughout the observation period.

Anish Teli, managing partner, QED Capital, expressed concerns about the prevailing sentiment among new investors. “This year’s stock market rally has been notably more widespread than in previous years. The proportion of stocks that have seen an increase of over 12% in the past year is higher than that in the last few years. This trend seems to support the idea that one can do well even by throwing a dart blindfolded in the stock market. However, this is creating a misleading sense of assurance among new investors about their stock selection abilities," he said.

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