The graph tells the story. In terms of returns on asset classes in India for long term investments, equity funds win out easily, over real-estate and fixed deposits in the long term, and significantly over gold in the five year term (data for all assets adjusted for tax payouts).
Why then, don't Indians put more of our savings into the stock markets? Just
2 percent of India’s household savings are exposed to equity; in the U.S., the long-term
average is 45 percent.
Two thirds of Indian savings go into assets like real-estate and gold, despite data that shows returns here are lower or uneven. Gold is seen as a safe haven by Indians, but performs well only in periods of time when uncertainty in the capital markets is high. Investment in gold over the past five years has given very low returns as we can see in the chart above.
The 'real-estate mindset' versus the 'stock market mindset'
Equity mutual funds deliver better results than other asset classes over the long term, but you can't shake the commentary you hear from people when they talk about the stock market: "I lost money," someone will usually say, and tell you the particular stocks that took them down and wiped out their investments. So why doesn't the data bear this out?
The challenge for many investors is the focus many have on 'playing the market'. A booming stock market attracts great news coverage, big-name IPOs start listing, attracting new investors. This is part of the attitude problem: rather than seeing equity as a place to safely park our money for the long-haul, we see the stock market as an opportunity, a near-gamble, investing when there is buzz and the returns are high - when the market is peaking. Then the low comes, panic sets in, and investors pull out. This is counter-productive behavior, and it is also the opposite of how we approach real estate. When we are purchasing land or apartments, we are highly conscious of the rate per square feet, the quality of the location, the closeness to metro stations and markets. We take our time, evaluate, make sure we are getting the bang for our buck.
And once we buy, we don't pull out easily. We sell land and for that matter, gold, when we are pushed to. We don't rush to dump an apartment when prices are low, instead we wait till the prices recover. But we don't behave similarly when investing in the stock market. And this is despite the fact that a single investment in real estate is usually upwards of six figures.
The investment size
Our behavior in real estate is more rational even though we spend a lot more. Regular investors tend to put money in the range of Rs. 5,000 on a stock they are bullish about, while home EMI outlays in India easily go over Rs. 10,000 a month. The nut then is this: Indians put in more money, and hold on for longer on an asset class that has shown over and over, to give lower investments compared to equity funds.
The downside of daily tracking
Sure, daily tracking gives you great transparency on your investment. But which homeowner knows the value of their flat or plot on a day to day, or hour to hour basis? When an equity investor keeps seeing red in his portfolio day after day, its tempting to finally take the step of dumping the investment, thus falling into the trap of selling when things are low, rather than high.
If we invest in stocks with the 'real estate mindset', we will see the returns that we are looking for. In the case of the stock market, it simply doesn't pay to 'play' it or 'live in the moment', and flee when the market falls. We need to treat this investment the same way we have treated our other assets, to see worthwhile rewards.
Asset type | Returns on investing Rs 1 lakh over 5 years | Returns on investing Rs 1 lakh over 10 years |
BSE Sensex | 1.68L | 2.36L |
Gold | 1.01L | 2.76L |
Real Estate | 1.23L | 2.12L |
Bank FD | 1.26L | 1.73L |
Returns, adjusted for tax payouts. September 2016.
