No doubt benchmark indices do bounce back with vigour after a steep fall like this. For equity investors, FY20 would be among the forgettable years, as the benchmark indices Nifty50 and the BSE Sensex crashed by about 25 per cent. Most of the fall came in the last quarter, especially in the last 45 days, with a slump of almost 30 per cent, leaving a little time to investors to adjust their portfolios.

When the market fell about 35 per cent in FY2001, following the Ketan Parikh scam, it bounced back sharply in the successive years. In FY04 and FY06, benchmarks jumped 66.2 per cent and 56.8 per cent, respectively. Similarly, when the market crashed 43 per cent following the 2008 crisis in FY09, it bounced back 65 per cent in FY10. Since then, benchmarks have only taken baby steps without causing a major disruption until last quarter.

So, is it a golden opportunity for investors to enter equity markets? No doubt, it provides an opportunity where a number of stocks are available at a very decent valuations.

This said, if you are a believer of benchmark indices giving a 15 per cent CAGR in the long run, think twice, as that calculation itself is questionable, because benchmark indices undergo churning frequently in their constituents.

Lessons from index recast

Only winning horses are loaded into the index and the underperformers are weeded out quite regularly.

The recent instance is Indiabulls Housing Finance. When the NSE announced its exclusion from the index in August, it was hovering around ₹450 , and now is in the sub-₹100 level. At the same time, Nestle that replaced IB Housing, was hovering around ₹12,500 but moved swiftly to current ₹15,500 level, despite severe bear market conditions. Assuming no changes has happened in August, then the Nifty index fall would have been at least 2-3 percentage points more.

This suggests that if the story is unattractive, exchanges show no mercy and remove the company from the benchmark. If the index had stayed with its original constituents, the return may not be that great.

Lessons from past crashes

Investors might have forgotten that the earlier crashes during the Harshad Mehta (1995) and Ketan Parekh (2002) scams happened in a less regulated market. Most of the companies’ share prices that zoomed then absconded or shut shop due to dubious promoters. The stocks are either suspended by the exchanges or not traded at all, giving no exit opportunity. However, the recent crash of 2008 should be in most peoples memory.

At least 65 per cent of the stocks that have crashed more than 50 per cent have never recovered in the last 10 years. Some are now worthless.

Sadly, most of retail investors are still stuck in those stocks, hoping against the hope that they will recover somewhat if not fully.

So, the lessons are that one should be able to book profits or cut losses at a predetermined price. Even if one is confident about the company’s prospects, he/she should take at least profit at high valuations and keep the initial investment. Likewise, if the company’s stock is not behaving according to the expectation, be brave enough to exit the stock from the portfolio and redeploy those funds elsewhere, as exchanges do for their benchmarks.

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