SEBI registered Investment advisor (RIA) with Registration number – INA 000000342.
Investment ideas for next decade-Gold or Equities?

We were saving. Not investing!

If you ask anybody, which country is going to emerge as a winner in the coming decade in terms of growth, the answer is India. But, will this result into proportionate wealth creation? This will depend on the way we invest? This looks challenging, looking at the conservative asset allocation, we follow.

We prefer investments in Bank Deposits, real estate and Gold compared to equity. Thanks to the availability of home loans at reasonable interest rates. Last decade was a blessing in disguise for Indians because of 2 factors. Huge appreciation in real estate prices and the sky rocketing gold prices! We are the largest buyers of gold in the world (buying around 30% of the global sales). The household stock of gold in India is estimated to be around 18,000 tonnes worth around $950 Billion! This is more than 50% of India’s GDP and is slightly above 10% of the global stock of gold! So, in case of any crisis, we have enough gold to pledge like in the case of 1991 crisis.

It is true that Gold and Silver have outperformed equities in the last decade. But the million dollar question is whether this will continue in the coming decades? The answer may be NO. If you analyze, the gold returns in the past decade, it is clear that the major outperformance came in the last 4 -5 years. This was due to the global financial crisis and the resultant demand for gold. Normally, gold will outperform, when, there is a financial crisis or in case of war etc. You can relate the recent price rise in gold to the US downgrading by the rating agency S&P and the Crisis in Europe. But a financial crisis of this magnitude occurs very rarely. If you see the growth of gold prices from 1985 to 2005 (20 years), it is less around 3% CAGR (see the chart below).

The Road Ahead – Equity or Gold


With the global economy recovering gradually, there will be demand for equities. If you analyze the returns generated by gold and equity over the last 3 decades, the story is different compared to the last decade. Gold has given a CAGR of 3-3.5% only while equity return (Sensex) was around 17%. All of us are seeing the current growth in the Indian economy, which is poised for above 8% growth in the coming years. In this situation, equities can easily deliver returns above 15%. But we are good savers but bad investors! While FIIs and investors from other countries are investing in Indian equities, we are depositing our money in ‘safe’ bank deposits! Indian household invest less than 10% of their savings into equities – one of the lowest percentage globally. While other country PF trusts are investing their money in Indian equities, our PF trusts are investing in ‘Safe’ avenues and generating 8% returns! The recent developments in US and Europe will make countries like India very attractive for investments on a long term basis. This decade will see a major shift in the investment strategy among Indian households from debt to equities.

Since debt, real estate and gold are the default option for most of the Indian investors the need of the hour is a push for equity investments for long term goals, in line with the risk appetite, life stage and term to the financial goals. We should definitely go for bank deposits, gold and real estate as part of our asset allocation. Since, the allocation to these assets is already there for almost everybody, it is advisable to concentrate on equities now. This can help you for a decent retirement in a country where there is no social security scheme or free health insurance by government. You can see lots of pensioners opting for Reverse Mortgage now to manage their retired life because of their over dependence on debt savings.

Real estate prices have already started cooling down (home loan interest rates are shooting up!) in major cities, Silver prices have crashed from the peak this year and gold is also likely to cool down, after this fast run. Even though it is a safe haven, please remember that the Gold prices have crashed around 70% in 1980 after hitting a peak. At the end of next decade, it will be the equity investor who is smiling over those who invested their entire savings in debt, real estate and Gold. Let us do a proper asset allocation and invest in Equity, Debt, Gold and Real estate as per the risk profile to reap maximum risk adjusted return.

Let us allocate a decent share of our savings into equities through direct shares or through Mutual Funds in the coming years and enjoy the India Growth Story, rather than allowing FIIs and other nationals enjoying it! The SIP way of savings will be more beneficial for retail investors to save regularly. The Direct Tax Code which is going to come from 1st April.2012 will also encourage equity investments.

Let us start thinking beyond the traditional insurance and bank deposits. Add a kick to your investment returns by adding Equity into it. It will be volatile in the short term, but it will be the clear winner on the long term.

 

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