Only the equity, which, despite facing the risks of market volatility in the short run, has the ability to create substantial wealth in the long run that can beat the inflation substantially.
Market volatility frightens most people and turns them away from equity investments to the safety of fixed-income instruments. As fixed-income instruments don’t face market volatility and give positive returns, investors don’t suffer from any anxiety and oblivious of negative effect of inflation, think that they will end up amassing considerable wealth. However, the reality is that it is the equity, which, despite facing the risks of market volatility in the short run, only has the ability to create substantial wealth in the long run that can beat the inflation substantially.
The recently released report of Motilal Oswal 24th Annual Wealth Creation Study 2019 has aptly demonstrate the power of equity to create wealth for investors, with some Financial Sector companies generating over 75 per cent compound annualised growth rate (CAGR) in 5 years and even consistently providing 49 per cent CAGR in 10 years, while fixed-income instruments struggle to beat the inflation.
As per the Motilal Oswal that listed the top wealth creators in the last 5 years (from 2014 to 2019), with a CAGR of whopping 78 per cent, you would end up getting Rs 17,86,899 by investing Rs 1 lakh 5 years back in Indiabulls Ventures, a Financial Sector company that clocked the fastest growth in the period. Same investment for the same period would earn you Rs 16,88,742 if invested in Bajaj Finance, another Financial Sector company, which generated 76 per cent CAGR in the period.
Similarly, in 5 years, the same investment in Bombay Burmah, with a CAGR of 68 per cent, would have generated Rs 13,38,276, Aarti Industries (CAGR 67 per cent) Rs 12,98,919, Sundaram Fasteners and Bajaj Finserv (both with 55 per cent CAGR) Rs 8,94,660 for you.
Going by consistency, according to the Motilal Oswal report, with a CAGR of 49 per cent over the last 10 years, Financial Sector company IndusInd Bank would have generated Rs 53,93,400 for you, if you have invested Rs 1 lakh in the company 10 years back. Similarly, in case you have invested Rs 1 lakh in either Pidilite Industries or Titan Company 10 years back, with a CAGR of 40 per cent, you would end up amassing Rs 28,92,546.
So, for the third consecutive year, Financial Sector has emerged as India’s biggest Wealth Creating sector over 2014-19.
However, among the biggest wealth creators, as per the Motilal Oswal report, Reliance Industries occupies the topmost position by creating Rs 5,63,600 crore of wealth in the last 5 years (i.e. from 2014 to 2019), while HDFC Bank occupies the second position with wealth creation of Rs 4,08,500 crore during the period. TCS occupies the third slot by creating wealth of Rs 3,65,500 crore in the last 5 years.
Following table shows the top 10 wealth creators in the last 5 years, top 10 companies with fastest growth in the last 5 years and top 10 most consistent companies with high CAGR in the last 10 years.
Compared to the returns provided by the top wealth creators, Rs 1 lakh invested in a bank fixed deposit (FD) with average interest rate of around 7 per cent would have generated Rs 1,40,255 in 5 years and Rs 1,96,715 in 10 years.
However, equity investors need to choose the companies, in which they want to invest, as a wrong choice may put the capital invested in danger. Otherwise, equity mutual funds (MFs) are better way to invest than direct equities.