No, investing on Diwali doesn’t fetch high returns

Towards this end, stock exchanges keep the trading window open for one hour, in what is traditionally known as ‘muhurat trading’, on Diwali—the festival of lights is celebrated on 24 October this year. On Dhanteras—the first day that marks the festival of Diwali, investing in precious metals like gold is popular as people think it brings them luck and good fortune.

“I believe in Indian culture and values, so, I just do a token investment on Diwali each year. It’s just a sentiment and nothing more than that,” said Vikas Khemani, founder, Carnelian Asset Advisors.

Making investments on this day has a lot to do with the sentiments and beliefs in our value system but this should not be done with expectations of generating higher returns. We analysed the 1-year performance of the broad market index—Nifty 500 TRI—and gold as represented by Nippon India ETF Gold BeES during the last 10 years. There is no evidence to prove that making investments during ‘muhurat trading’ or on dhanteras  generates extra returns.

During the period we analysed, only in four out of ten years, a share market investment made on Diwali would have outperformed the average return made by investing on any other day during the calendar year. Similar is the case for gold. Here, the average return is the mean of the 1-year return rolled during each calendar year. 

The best and worst Diwali, in terms of 1-year return from the stock market investment, would be in 2020 and 2017 with 52% and -2%, respectively. The correction in the stock market in 2020, in the aftermath of covid-19 outbreak, and the consequent rally in the market in 2021 helped generate higher returns from stock investments in 2020. For gold, the best and worst Diwali investments would be in 2019 and 2013 respectively, with 31% and -13% returns in one year. The spike in gold prices in 2020 as investors moved to safe-haven assets from risky stock market investments resulted in higher 1-year return from the asset class for investments made in 2019.

It is a no-brainer to understand that this is not just for the investment made on Diwali. Any underperformance or outperformance compared to other dates in the year is just because of the normal market action and has nothing to do with muhurat trading or dhanteras. “There’s no harm in putting some incremental money into your portfolio on Diwali, if the investor believes it is auspicious, but the starting point and end point cannot be from one Diwali to another,” said Gurmeet Chadha, managing partner and chief investment officer at Complete Circle Wealth. 

Diwali stock ideas

Experts and brokers often come out with stock investing ideas on various media platforms during this season. Though such recommendations could be given in good faith, there are a few things investors need to keep in mind before taking these ideas seriously. 

The most important thing is the timing of entry and exit in stock market investing.  “Each stock has an entry and an exit point. You may not see the same expert talking about the same stock once Diwali is over. You will have an entry point, but not know the exit point,” said Basant Maheswari, co-founder & partner, Basant Maheshwari Wealth Advisers.

The importance of timing becomes crucial in the case of cyclical stocks, which are more volatile than non-cyclical or defensive stocks. Thus, it is better to avoid considering stock recommendations, especially cyclical stocks, by experts on media platforms.

Even for other stocks, one can consider recommendations only as an input for  your market research.

 “Investors’ psychology everywhere is to seek tips. But, they need to learn enough about businesses and stocks. By considering stock tips, you can borrow the idea, but you need your own conviction to hold onto these ideas when things go bad,” opined Samir Arora, founder and fund manager at Helios Capital Management.

An understanding of valuations, business and governance are important to generate reasonable returns from equity. When investing directly in stocks, “there is no substitute to doing your own research or understanding the business. There is no alternative to building your own conviction,” added Khemani.

Experts also suggest that we need to understand the background of experts giving recommendations. There are experts who advocate various styles of investing such as momentum, value, and growth. Each comes with different requirements of holding period, risk appetite, etc. 

Further, there were many instances in the past in which the calls by celebrity investors went wrong. Taking cues from their holding for your personal investment, too, is not advisable. 

For example, the late Rakesh Jhunjhunwala, a renowned investor held DHFL in his portfolio in the past. After failing to service its debts, the price of the non-banking financial company collapsed and the firm was finally delisted in 2021. 

“Star or celebrity managers can afford to lose money. Most retail investors can’t,” said Vidya Bala, co-founder, PrimeInvestor.in.

Sunil Singhania, founder – Abakkus Asset Manager, said retail investors shouldn’t directly invest in stocks. “They should be investing in mutual funds, one of the most efficient forms of investing,” he added.

Portfolio approach

When investing in stocks based on recommendations, one also needs to examine where that stock fits in one’s portfolio.

“Apart from the overall asset allocation, a portfolio approach for each asset class is necessary. For equity, both in terms of the risk profile of the stock, and the diversification or the concentration that the stock is adding to investors’ portfolio is to be checked,” added Bala.