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.
About Author / Additional Info: