Alert! Are you refraining yourself from entering the market? You might be losing money by NOT investing in Nepalese stock market

-Krishna Khatiwada

Right now the Nepalese stock market is in the bearish trend and many investors are in a huge loss.

The losers are not only limited to the one who has invested in the stock market but it goes beyond that to the ones who haven’t invested in the stock market.

Here is how?

For middle-class people we are majorly exposed to the two types of investment, one is in the Fixed Deposit (FD) and other is in the capital market.

When we imagine a return from the stock market, we will always compare it with the fixed deposit returns. The fixed deposit interest rates and stock market booms-bear appear in the cycle. There is a strong inverse relationship between them. At this time, banking interest rate is booming and the stock market is crumbling.

Liquidity in the banks has the major effect on the interest rates. Thus, for considering interest rates we need to consider the period of high liquidity as well as of low liquidity and for that we have taken the average FD rates from the year 2014 to 2018.

The chart below shows the weighted average fixed deposit rates from January 2014 to February 2018.

In the last four years, the lowest fixed deposit rate is 5.34%, recorded on the August 2016 and the highest fixed deposit rate is 10.32%, recorded on the September 2017.

Currently, the fixed deposit rate is above 10% but usually, FD rates stood below 8% in Nepal. The average fixed deposit rates in the last 4 year is around 7.3%.

Taking into consideration the average Fixed Deposit rates of 7.3%, if we have invested Rs 10 Lakhs in the year 2000 then our gain from FD in last 18 years would have been around Rs 25.54 lakhs in total. On average we will gain Rs 1.42 lakhs per year which is around 14.91% of the total invested capital.

Now let us compare the return from the stock market.

NEPSE started its trading floor on the 13^th January 1994 with the index value of 100 points and as of 9^th August 2018, the Index stands at 1180 points. In the last 24 years and 8 months, the index has increased by 11.8 times with the CAGR of 10.52%.

After the introduction of NEPSE's trading floor, the civil war began in the country in 1996. The civil war was the biggest hurdle for the country's overall growth. As a result, NEPSE didn't grow to its potential during that time. The civil war had lasted for a decade and eventually ended in the year 2006.

Taking into consideration CAGR of 10.52%, if we have invested Rs 10 lakhs in the year 2000 then we would have made a profit of around 50.52 lakhs in the last 18 years. On average we will gain a 2.8 lakhs per year which is 28% of total invested capital.

We are putting the amount we lose by not investing in the stock market in mathematical form.

Amount loss = [(1 + Stock Market CAGR/100) ⁿ   - (1 + FD CAGR/100) ⁿ]* Invested capital

Where n is the number of years

Assuming above consideration,

If we calculate the amount we lose by choosing FD over stock market for 25 years, then the loss will appear around 63 lakhs, which is 630% of total invested capital.

When we take a small "number of years", then the difference in amount will be very minimal. However, with the increase in the number of years, the difference will be huge.

Note: There is risk associated with the stock market investment and investing in the stock market requires skill and knowledge which can be developed over the time. So start learning about the stock market and don’t lose your hard earned money by investing in FD.