Equity a sureshot recipe for success in long run

Updated: May 13 2014, 14:27pm hrs
Equity, as an asset class, is on a roll this year. While prices of some stocks have doubled in a few months, others have seen double-digit growth in just a month. But if you look back to, say, eight months ago, most investors were bearish on stocks as the markets were volatile on the back of Fed tapering talks and interest rate hikes in India. Now, investors have suddenly become bullish on equities and are ready to bet their money.

So, why this bias towards a particular asset class In the past, real estate, gold and bond funds took turns to become investor favourites, but equity investments were not much of a priority.

Asset classes typically perform in cycles. Take, for example, gold: Till about 2007, the precious metal was more of a traditional investment option to be used at the time of marriages or other festive occasions. But following the global financial crisis in 2008, investors took to gold as a hedge against any meltdown; even central banks across the world starting augmenting their gold reserves. But a year ago, global gold prices started to tumble as growth in the US and Europe picked up momentum.

Real estate still remains an all-time favourite of many Indians. For long, for a typical Indian middle-class person, real estate meant owning a house. But with the opening up of the economy, multiple ownership of property across geographies became the new normal and investing and leveraging the new model. With banks offering cheap loans, it only fuelled the fire. But then, the party lasted as long as the financial ecosystem was stable.

Downsizing at workplace, interest rate hikes and slowing down of the economy all contributed to negative sentiments. Those who got in early were sitting pretty, but those who entered late were hit.

There are instances where investors are selling their holdings at lower than the acquisition price and, surely, leveraging has not worked in their case.

Equity a long-term wealth creation engine

Lets look at equity now the financial asset class that has the lowest ownership among the investing population. Financial scams and inept regulation have only made investors wary of equity. It is looked at as an avenue to make a quick buck, akin to gambling, which is not the case. Financial literacy is missing among the educated people of India and mis-selling has only added to the problem.

At end of May 2004, Nifty was at 1,483; on May 9, 2014 , it was at 6,858 a clear growth of 4.6 times. In other words, R100 invested in May 2004 was at R462 in May 2014: An annualised return in excess of 16.5% and, that too, tax-free and not including the dividends that have accrued.

Just by holding on, these returns were generated. If you consider stock-specifics, then the returns have been much higher. The framework for investment is similar to the investment methodology of any other asset class. Always remember equity is a wealth creator: If you invest based on the fundamentals, it will never be a gambling den. Equity as an asset class is your long-term wealth generator. Invest in equity with a multi-period investment horizon with small amounts at the beginning. And slowly, but definitely, increase your holdings and you will not be disappointed in the long run.

Brijesh Damodaran

The writer is founder and managing partner of Zeus WealthWays LLP