February saw an important switch in investment flows. After a long phase of persistently selling Indian equities, Foreign Institutional Investors (FII) decisively bought Indian equities, leading to net inflows in excess of ₹ 25,000 crores in February. Whether this is a decisive reversal in FII sentiment remains to be decided.
But, this is an encouraging early signal. There is something very interesting that seems to be happening amongst domestic investors. Domestic investors seem to be driven by acute FOMO (fear of missing out) and are chasing gold and silver around their peak prices. In the process, monies are moving from equities into precious metal ETFs. While it could be seen as a routine act of investors changing their asset allocation, there is more to this trend than meets the eye. Investors are buying precious metals after their sustained uptrend in prices. They are selling assets they bought at high valuations like small cap funds to buy precious metals. The problem with this switch is that investors are committing the same mistake again.
Buying an investment after a period of superior performance is always fraught with risks. Often, such periods are followed by a phase of time correction or even negative returns. Investors who chased smallcap mutual funds in 2024 have experienced this in their portfolios. But, their selling of small cap funds now and moving into precious metals like gold and silver could become a repeat of the same mistake.
Buying the wrong product at the wrong time is a double mistake. Repeating mistakes in this manner leads to reverse compounding and destruction of capital. While investors should aspire to buy investments that can generate higher returns, they should definitely avoid buying the wrong investments at the wrong time.
Choosing when and where to invest in a timely manner is essential to ensuring that compounding works for you. Remembering this at all times will ensure you invest and grow your capital in a sensible way.
