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Beware: Equity Investment Does Not Give the Best Return in India

BY: Vivek SHARMA | Category: Finance | Submitted: 2010-11-18 17:31:06
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Article Summary: "This article provides an insight into how investment in equity does not provide the highest return, contrary to popular perception in India..."


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There is a general perception that equity investment gives higher return compared to other asset classes in the long run. This is often stated by the so-called experts appearing on television channels and writing in newspapers. These experts always insist that equity must be the part of portfolio of all the investors as they give highest return in the long run. Let me examine this through my own analysis.

Though there is no universal definition for long run, in Indian context long run is considered as three years and more for the purpose of taxation for all capital assets, barring equity shares and units of equity mutual funds. It is noteworthy that for equity shares, long term is defined as more than a year for the purpose of taxation. Since securities transaction tax is paid on shares purchased through stock market, no capital gains tax is levied if the investment is made for a period of more than a year.

If we consider long run as three years or more, equity market investments have not performed well at all for several blocks of three years. To understand this, we will use index i.e. BSE Sensex as the benchmark. Let us start with the current period first.On 01-Nov-2010, the BSE Sensex closed at 20355.63 (Adjusted closure). Three years back on 01-Nov-2010, the Sensex had closed on 19363.16. Imagine the case of a passive investor, who had invested in BSE Sensex through an index mutual fund. His returns would be almost negligible. The reason why Sensex has been selected as the benchmark was comparison is that it is barometer of market movement and represents all sectors of economy. This goes on to show that equity investment does not essentially give the highest return in the long run.

Let us take another example. On 01-Jul-1997, the Sensex had closed on 4305 .On 01-Aug-2003, it had closed at 4244.73. This means that a person, who had stayed invested in Sensex for around seven years, got a negative return. This again shows that even for a long term passive investor, Sensex generated negative returns for almost six years.

In Indian equity market history, only period from May 2003 to Jan, 2008 have been phenomenal in terms of return. The investors who had entered market during this phase witnessed a sustained secular run in the market and made good amount of money. If this phase of equity market is ignored, equity investment has not been good at all for retail investors. Now investors have become aware and they are not participating in the market, the way they did 3 years back.

Investments in other asset classes like gold and real estate (no doubt requires huge capital) have been more consistent and higher than equity returns. Even PPF is not a bad investment considering the fact that it is totally tax free. So don't get swayed away by the experts who say that equity is the best investment and you have it in your portfolio. Always use data available for the purpose of analysis and make informed decision.

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Comments on this article: (7 comments so far)

Comment Comment By Comment Date
I am equity investor since past 3 decades. There have been times when equity investment generated negative returns for the sensex, but the markets bounced back and many of my shares turned multibaggers - Hind unilever,ITC,Bajaj auto,Cipla,Tata steel, Tata chem, M & M,ICICI,HDFC fetched very good returns for me. It is a finaancial suicide if this form of investment is neglected. Passive investment in good companies will always fetch very good returns and will make onr moneyed, very little doubt about it mahajan anil 2011-03-24 01:57:11 692
Mr. Anil Mahajan, I am happy that you made good money from investments in shares. However, please do not be under the impression that shares are must for wealth creation.People have created wealth without any investment in shares. Instruments like debt,gold, real estate give better returns and are mostly less risky than equity. You have been made to believe that equity is a must for investment. This is not correct and you can continue to prosper without equity.For your information ICICI Bank shares have given negative return in last three and half years.You can check the data. On 5th November, 2007 ICICI Bank shares traded at a price of 1300 plus. Today the shares are trading at price less than that, even after you consider dividend given. I can only say that you are lucky and everybody cannot be as lucky as you. This does not make equity a better investment. Vivek SHARMA - Author 2011-03-24 08:26:34 694
since 1 june 1991 to 1 jun 2011, sensex has given annual compounding rate of return of 14.61% which means Rs 10,000 would be worth about Rs 1,43,000. Fixed deposit rates in 1991 was around 13% which mean Rs10,000 would have fetched Rs 1,05,230. Sir, I beg to differ but 3 years in my book is not a long term investment. Further, mutual funds like Hdfc growth have given returns of 23-24%.for the past 16 years..gold on 3rd june 1991 was $363 on 1st june 2011 it is at $1545 which is a return of 8.65%(pathetic)..real estate investment on the other hand totally depends on the location...I think you should do an in depth research before posting such a cynical article.. bikash 2011-06-01 11:20:12 816
What are you thoughts on Sensex return from 1991 to 2003? Please revert with your views.Just because markets were manipulated between 2003 and 2007, you cannot term Sensex return as great. Please check. Vivek SHARMA - Author 2011-06-02 07:10:04 818
ok wats wrong with th sensex from 1991 to 2003..from 948 in 1991 to 5920 in 2003..thats compounding rate of return of 17.95%!!! infact..u need to understand that uptrends and downtrends are part of the stock market..that is why time periods of at least 5 years is needed to smooth out the volatility and witness growth in your investment..please understand..just as important as your entry level is your exit level..you have to plan them for maximum gains..what you are calling manipulation is a minuscule part and as the size of the market grows..it will become harder for such entities to sway the market..when you create a portfolio..you should not bet the farm on one horse..frankly speaking with official inflation around 9% and unofficial inflation in double digits..there aren't a lot of places which can beat inflation..therefore..stocks in my opinion should be part of everyone's portfolio..the only problem is that the public always rushes when the market is nearing its peak..and then gets their hands burned and says..stock market is gambling...remember one thing once the stock market figures in the headlines of a national newspaper..it is time to exit or at least book some profit....my 2 cents bikash 2011-06-03 09:34:56 821
In May 2003, Sensex closed at at value of 2949 ( Intra-Day on 02-May-2003, Source Yahoo Finance) which means that the average annual return given by Sensex was merely 9.9% from 1991. This was less than fixed deposit return was the period which was around 11%. Also between 1995 to 2003, Sensex gave negative returns. The fact that equity market gives less return than other markets have always been true barring some phase between 2003 to Jan, 2008 in India. Mr. Bikash I have got 18% and more returns on fixed income when I took risk and invested in unsecured funds. Equity market has never given such returns, exception being 2003 to 2008 as mentioned above. Please no more analytical in your approach. Equity is definitely not the best investment option. Vivek SHARMA - Author 2011-06-05 08:40:12 823
Also, please don't talk about timing in market. You can claim yourself to be expert but there is a thin line of difference between strategy(skill) and chance. In equity market you get returns by chance and not timing and strategy. rnrnAll your skills are only luck and nothing else. Please don't get fooled by randomness.rn Vivek SHARMA - Author 2011-06-05 08:44:25 824

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