Investors’ dilemma

The sharp fall in the Indian stock markets has affected investors in some less obvious ways. As the Sensex fell from its peak of 21,000 in January to 13,000 in a span of six months, it is not just that the investors have lost — in some cases the value of their investments would have gone down by more than a third. An equally significant loss lies in the shrinking of opportunities for investments, including some within the stock market. A key question today is whether one should remain invested hoping for a market revival in the near future, and it cannot be answered unequivocally. Barring some exceptions, even the experienced and professionally qualified mutual fund managers, portfolio managers, and other kinds of investment advisers could not read the markets any more accurately than ordinary investors. Their advice and guidance were eagerly lapped up when the stock prices were on a seemingly inexorable climb. Even if forthcoming, they are much less relied upon nowadays. Mutual funds, the officially recommended investment option for the lay investor, have not delivered on their promises. Many of their once-successful schemes are languishing, having fared worse than their benchmark indices. There has understandably been a decline in the quantum of assets they manage. The fact that the decrease is still within manageable proportions has more to do with the lack of other avenues available to their investors.

Certain well known weaknesses of the Indian capital market have come to the fore and are contributing to the uncertainty. The retreat of foreign institutional investors from the equity markets has created a void. Forecasting stock price trends has become more complex as global clues will have to be factored into the calculations to a greater extent. The absence of a vibrant corporate bond market is keenly felt. Deposits with banks have been the traditional investment avenue for those seeking a safe and regular return. With inflation ruling well above 11.5 per cent, most bank deposits that carry a maximum interest of 9.5-10 per cent are yielding negative returns. That in turn can discourage savings, with its attendant deleterious consequences for capital formation and the economy. Only medium-term reform of the financial sector can help banks cut down on their transaction costs and narrow the spread between their lending and deposit rates. It is no doubt a welcome development that the LIC and the private insurance companies are reaching out to wider sections to mobilise contractual savings. For policy-makers, it is imperative to develop safe and attractive short-term investment avenues as well.

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