Do you think putting money at Bank is better than investing in stock market? Let’s debunk this myth

Thu, Oct 11, 2018 1:08 PM on Exclusive, Latest, Stock Market,
Do you thi...

Aakriti Thakali

Bear & bull, up & down, peak & trough are the natural characteristics of any stock market, or any market in general. However, most often we tend to find comfort in the false belief that the only way is UP and that is when disappointment occurs. When the bull of 2016, 27th of July touched 1,888 points no one anticipated the loss they were going to incur, some left the market and some are still paying the dues. Amidst all this chaos, a true investor could find relief in the fact that, “if you’re in it for long term and are devoting enough time to analyze all the fundamentals, then the chances of incurring losses are close to zero.”

Similarly, in this year’s bear when the banks started to push their rates up, we often got to hear that the money is Fixed Deposit (FD) provided a better yield than the stock market. Well, it’s true but only if you are a trader and looking for short term gains. But if you want to be an investor then it might be the symptom of “Myopic vision” (short sightedness).

Look at all the great, successful and influential investors, what do you find in common? The basic traits are:

            PATIENCE

            LONG-TERM VISION

            PORTFOLIO DIVERSIFICATION

            Focus on MINIMIZING the losses along with MAXIMIZING the returns

This is what Warren Buffet says and if you want a local figure, this is what Ambika Pd. Poudel says.

So when we say long-term, how long is the long term? In context of Nepal, we can take 5 years as long term because the market cycle usually takes 5 years to complete a bear and a bull run. Keeping this in mind, the analysis here on out has considered a period of 5 years from October 10th, 2013 to October 10th, 2018.

One of the important traits of successful investor is portfolio diversification. The problem here is that more than 80% of Nepal’s capital market is dominated by Banks and Financial Institutions (BFIs). Nonetheless, we can diversify our portfolio by investing all the sectors as segregated by Nepal Stock Exchange (NEPSE).

Let us suppose that on October 10th, 2013 you had Rs. 10 lakhs at your disposal. The two options you had were either to keep it on Fixed Deposit account at a bank or invest in the capital market. You’d like to access both your options and the returns that each alternative will yield. So the analysis is presented below:

Investing in stock market

Since you didn’t have any extensive knowledge regarding fundamental analysis of the companies, you decided to minimize your risk by diversifying your portfolio and investing in all the sectors that were selling that day. Based on this premise, you choose following stocks and invest Rs 1 Lakh each on all 10 stocks:

  

So by using SSPro software, we can easily access how much each of these shares are worth today if we had made the investment as shown in above table. So analyzing each stock, we have:

Everest Bank Limited (EBL):

 

(Image taken from SSPro software)

Muktinath Bikas Bank (MNBBL):

(Image taken from SSPro software)

Shree Investment Finance Company (SIFC):

(Image taken from SSPro software)

Oriental Hotels (OHL):

(Image taken from SSPro software)

National Hydropower Company (NHPC):

(Image taken from SSPro software)

Gurans Life Insurance Company (GLICL):

(Image taken from SSPro software)

Neco Insurance Company (NIL):

(Image taken from SSPro software)

Himalayan Distillery (HDL):

(Image taken from SSPro software)

Womi Laghubitta Bittiya Sanstha (WOMI):

(Image taken from SSPro software)

Nepal Doorsanchar Company (NTC):

(Image taken from SSPro software)

Thus, if we incorporate all the above details in one picture, we can see that the initial investment of Rs 1 lakh on October 10th, 2013 can yield Rs. on October 10th, 2018.

 

From the table above, it is clear that diversifying the portfolio has surely been a boon to your investment. The value of NHPC has gone below par now, but still it has made you a Compounded Annual Growth Rate (CAGR) of 5.97%, which is in fact higher than the rise in Fixed Deposit Rates from the year 2013 till now. Similarly, the bull of this cycle was led by Microfinance and Insurance sector, which is depicted by the awesome CAGR of the companies that you chose from this sector. So in totality, within a period of 5 years you have multiplied your investment by 7 times. 

Fixed Deposit at Bank

We have seen a substantial rise in the FD rates over the years. However, the rise in bank rate are easily surpassed by the returns given by the capital market. A few years back, the FD rates were as low as 5% to 6% and due to the to liquidity shortage in market the rates had gone up to as high as 13%, which was later brought down to 11% by the Gentleman's agreement signed by the Nepal Bankers’ Association (NBA). So, considering the most optimistic condition let the FD rate be 13%. Now, considering all factors constant, if you had deposited Rs 10 lakh in a FD account at 13% compound interest paid annually on October 10th, 2013, your money on October 10th, 2018 will amount to Rs 18 lakh 42 thousand only. This means by putting your money at bank you can barely double your amount in 5 years.

Verdict

 It is true that the decision making technique and process of each individual varies along with our risk appetite and our goals. For this reason, the shares picked were taken in random manner with no underlying premise -- the only objective was portfolio diversification. So when we are able to multiply our fund by 7 times just by diversifying our portfolio based on sectors, think about the gain we could have made if we also had done fundamental analysis of the companies that we chose.

If a thorough fundamental analysis was also done, then maybe we wouldn’t have bought NHPC and that would have changed your CAGR to a new direction. So the conclusion is, if you have patience to wait for the market to complete a cycle and if your carefully diversify your portfolio among all sectors then the returns are guaranteed.