Equities - a worthy asset class

Subprime fears, political instability or rupee appreciation — Indian equities have proved to be a worthy asset class for investors. A peep into the performance pattern of prominent asset classes reveal that equities, even in adverse market conditions, seem to provide a comparatively better bet for investors looking to pocket appreciable returns.

Stock investments have managed to yield a relatively decent 7% (base index taken is BSE Sensex) returns to investors, according to a sample study conducted by ET. Alternative asset classes like commodities (base index taken is ET Commodities Index), silver and gold have fallen in the 3-14% range over the past eight months, the study points out.

“Equity investments will always be good for people who are willing to ride volatility and stay invested for long. Going ahead, it should continue to outperform most alternative asset classes on a long-term basis,” said ASK Wealth Advisors CEO Rajesh Saluja. According to him the ideal investment time-frame in equities is five years. “
Generally speaking, on a normal market course, equity investments double in five years. This inference is reached by pinning the annual rate of return at 20%. In good market years, returns could scale up to 30-40% annually,” Mr Saluja added.

According to wealth managers, commodities, as an asset class, is cyclical and inversely proportional to the equities market. When equities do well, commodities generally tend to go into a ‘shell’. Over the past six months, commodities markets worldover have been witnessing volatility due to rapid changes in economic cycles.

India, which has a buoyant agri-commodity market, has been grappling with huge price instability, thanks to a wide supply-demand mismatch. Among metal commodities, nickel and zinc managed to do well in the initial months of 2007.

Likewise, gold and silver too have not being doing well in the past couple of months and is trading on a bearish note. Being traded in dollars internationally, gold was hit severely by an appreciating rupee. Any rise in the rupee against the dollar will push down the rupee value of gold. However, the segment is expected to pick up once the festival season sets in, says market observers.

Financial institutions and currency traders benefited the most with the rupee strengthening against the dollar between March and July. But such gains from the currency movement in a specific period can well be erased in the next, as the relationship between the domestic and foreign currency reverses, says experts.

“More than the return profile, it is the understanding of investors that make equities different from other assets. Asset classes like currency and commodities are complex for retail investors to understand and trade; there is no guarantee that investors will make money in these asset classes. Moreover, there is less retail play in these asset classes,” said Unitis Tower Wealth Advisors CEO Nipun Mehta.

Next to equities, real estate can be a performing easy-to-comprehend asset class. However, the returns profile (in the long term, the logical returns on real estate will be 15-18% annually) will be a bit lower than returns from equities, the sector is also a bit illiquid when compared to equities,” he added.