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Equity as an asset class – Part I

At a time when the Indian equity markets are trading near their all-time highs, the retail investor participation in the equity markets has fallen drastically over the past decade. Over the same decade, retail investments in real estate, gold and fixed deposits are nearing all-time highs. In such a scenario does equity have a place in the retail investor’s portfolio? What has been the experience of different retail investors over the past decade and what should they be doing now? Let us look at the experience three individuals have had over the past decade and what they are planning going ahead.

Ajay, Ram and Bharat all completed their education at a prestigious Institution in 2003 and have been working with leading multinational firms over the past ten years. As they have grown in their professional careers, they have invested their surplus money in different ways. They have all purchased gold jewelry in their family and they are very happy with the financial returns this has provided.  The three friends caught up last week for dinner. As they were discussing their financial status it emerged that they were all worried!!

Ajay – the safety seeker

Ajay went by the advice of his father and has invested in“safe” bank deposits and LIC Insurance products. His investments are giving 5-6% after tax returns. He had invested in some insurance products early in his career. When he needed money urgently and redeemed them, he found that they have very heavy upfront charges. To get high returns neighbor has advised him to invest in equity via a portfolio management scheme (PMS). But he has to find Rs 25 Lakhs for this which will mean liquidating his existing deposits and investing the money one time.

Ram – the Real Estate guy

Ram brought a piece of land in 2005. He was very happy with the returns he got and has put all his money in land and in two apartments.  While Ram is happy with the overall returns from real estate investments (18% per year), he has a serious liquidity problem.  The EMI payments for his apartments, take away a big chunk of his salary. When he tried to sell a piece of land, the recent slump in the real estate market has meant that he is not able to find ready buyers.  He can sell his other flat but he faces a big capital gains tax bill. He gets SMS’es with short term trading tips on stocks to buy and is wondering if he should invest as they promise very high returns. He is happy with “even” 25% returns per year.

Bharat – the Equity investor

Bharat’s neighbor has been a savvy investor in equity markets from the 1980’s. He is a mutual fund distributor and through him Bharat has invested his money in many mutual fund NFO’s as well as existing mutual funds. He holds 30 mutual funds and his returns are around 15%. He follows the TV channels daily and they are full of negative news. He did invest a lot of money in 2007/08 but then as the markets went down in 2008 he stopped investing. Now that the market has touched 20,000 again, he is keen to get back in the market. But he keeps reading in the newspapers about how “dangerous” equity markets are for investors. Is he taking too much risk? Should he sell his equity holdings and invest elsewhere?

While the three of them were debating about the best way ahead, who should they see but their college senior Hari!! Hari had always been a smart investor who had brought stocks and made money even while he was in college. Hari joined their table and they described their current dilemmas to him asking for advice on equity. Is equity good or bad? Will Indian equity do well or will be all “gloom and doom”? Should they invest in equity or not? If yes, then how should they invest and for what duration?

Watch this space for more!

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