Have you ever been late to a party before? Not the kind of party where it’s “OK” to be late, but the sort of party where you wished you had shown up on time because you missed out on something big?
That’s what it’s like, right now, for those who are not investing in the retail equity markets. Now, a very natural question may arise: why exactly are we labeling this as a party?
Since January 1 st 2003, gold prices have gone from approximately Rs. 19,000 per ounce to Rs. 76,000 per ounce. That’s a 300% increase over twelve and a half years, which comes out to an 11.7% return annualized using the CAGR (compounded interest) method. Additionally, gold has a taxation rate of 20% if one holds on to their investment for at least three years (with indexation to account for inflation).
Fixed Deposits are wildly popular; but FD rates have strayed between 6 to 9 percent on average since 2003 for those FD’s that mature after 12 months. Furthermore, you are taxed as per your tax slab on the profits. Using data from FD rates pulled from leading banks across the country, if one had invested 1 lakh in FD’s on January 1, 2003 and reinvested profits annually, he would be looking at on overall return of 128%. This means that his total capital would be around 2.28 lakhs. Keep in mind that I have not taken taxation into account! The average annualized return using the CAGR method comes out to just shy of 7%. The natural question arises: does this even beat inflation? (the answer is yes, but barely).
And then we come to equities. The Sensex, being the barometer for the stock market and making up an index of the 30 most prominent stocks listed on the Bombay Stock Exchange, was valued at 3390 on January 1st, 2003. Today’s close for the Sensex was 26840. In other words, the Sensex has gone up in value by a staggering 690%. That is an 18% annualized return.
If one were to tell you that over the past 150 months, equities outperformed FD’s 18% to 7%, and outperformed gold 18% to 11.7%, you would most likely look at the information with some skepticism. But wait- there’s more!
There’s a secret that, surprisingly, many investors are not aware of: if you hold on to an investment for more than 12 months, your profits are tax-exempt. This flies in the face of fixed deposits and gold investments!
And this is precisely why, through informed articles like this one, retail investor participation is climbing. Many make a big fuss about F&O trading activity picking up in India due to FII’s, DII’s, and day-traders picking up action- but what’s lurking behind those facts is that a new breed of investors is beginning to crop up. In February of this year, mutual fund managers reported that “the inflows of the past nine months have more than offset the cumulative outflows of past five years.” Assets under management by mutual funds are growing at exceptional levels. Sure, the bull market has a large say on how likely one is going to invest in equities, but the fact remains that informed decisions are always made through rational means.
And in this case, rationale and logic paves the way for the retail investor to forego the easy but much less attractive option of investing in fixed deposits. It paves the way for the investor to forego gold and other precious metals that not only do not appreciate as much as stocks but are not very easy to sell (have you tried selling gold?). Instead, logic is directing the self-informed investor towards equities. Whether it be through mutual funds or just making simple trades through a mobile app, retail investors are jumping back on to the ship.
And so the question remains: when are you going to join the party?