“Investors lose Rs 2.21 lakh crore,” claimed media reports, when the share market tanked on 13 August. This is not the first time we are seeing an alarmist headline. It is de rigueur in India, especially when the Sensex plummets. Surprisingly, gushing headlines aren’t to be seen when the market surges dramatically.
Surprisingly too, one doesn’t get to see such alarmist headlines when the gold or real estate market crashes, though in all fairness, it must be admitted that for the latter, there is no institutional trading akin to stock exchange trading.
What The ‘Evaporation Of Wealth’ Lament Is Rooted In
The Evaporation of Wealth dirge, routinely witnessed in our media, is rooted in a misconception that the stock market is the barometer of the economy. It never was, because apart from the macro and micro fundamentals, the market is also influenced by geo-political factors apart from liquidity — if foreign institutional investors pump in money, the market shoots up, and when they sell, the market goes down. No market, especially the share market, can sustain a unidirectional course forever. So much so, the loss to the investors sitting on their portfolio of shares is at worst, notional.
It is only the open-ended mutual funds that guarantee a market-related buyback.
Suppose, the Net Asset Value (NAV) of a mutual fund scheme is Rs 110 per unit at the end of the day. Suppose further, the mutual fund charges a 2 percent exit fee. An investor wanting to exit the next morning can ask the fund manager to buy him out. He will get Rs 107.80 per unit.
An Example To Illustrate That The Market Capitalisation Theory Is Fragile
The share market itself doesn’t hold out any such guarantees. In fact, the market capitalisation theory, from which flows the Evaporation Of Wealth lament, is too fragile, as it were. This will be apparent from the following example. Suppose a share ends the day at a fabulous price of Rs 1,000 up by Rs 100 vis-à-vis the previous day’s closing rate. And suppose there is a mad scramble to cash in the next day. Such a mad scramble might well result in the share crashing to Rs 800 in a single day. So the share market valuation of scrip is too ephemeral to even be given a hint of permanence. And to attribute loss of wealth from such fleeting valuations is just plain alarmist and irrational.
Drawing A Parallel With Real Estate
Incidentally, the fund manager of an open-ended scheme experiences an unrelenting redemption pressure when there is a mad scramble for redemption of units. Fortunately for the investor in such a mutual fund scheme, the fund manager cannot show his back to them. But no such luck in the market. The market doesn’t guarantee a price.
Let us draw a parallel with real estate.
Suppose the flat you bought for Rs 5 lakh appreciates to Rs 50 lakhs in a matter of ten years. You don’t sell it, and two years down the line, its value comes down to Rs 48 lakhs. Do you bemoan the notional loss of Rs 2 lakhs? Then why this hype about the share market alone?
Actual profit or loss is felt only when realised. Notional profits cannot be lionised just as the notional loss should not be bemoaned.
(S. Murlidharan is a Chartered Account, and has also written extensively for The Hindu Business Line between 1996 through 2013, and later started contributing regularly to Firstpost on a range of issues like business, economic, tax. He is currently based in Chennai. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
(At The Quint, we question everything. Play an active role in shaping our journalism by becoming a member today.)