• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

SCARRED by equities and hit by non-banking finance companies, investors in the past decade have headed for the safe haven of instruments offered by the government and banks. For the retail investor, equity investing has been a particularly painful experience. This has forced them to seek the safer small savings schemes and bank term deposits.

Risk preferences shift

But investors have not shied away completely from risk. This is especially true over the past five years. Household investments in relatively risky physical assets, which would include real estate and gold, have been on the rise. Interestingly, they have resorted to higher level of borrowings and, as a result, have taken on more debt during this period, reflecting the boom in housing fuelled by housing finance. It was also during this period that more risky asset classes, such as equity and real estate, rewarded security selection handsomely. Security selection refers to the choice of a particular stock or property. Annual returns over a period of 10 years could easily have been upwards of 20 per cent for a carefully nurtured portfolio of equity or real estate.

Now, investors are in an unenviable position. The asset class that they have shunned for a major part of the past decade, equities, remains the best option for both beating inflation and building wealth in future. Interestingly, there is already evidence that investors are aware of the changing dynamics. Household investments in equities have risen by 60 per cent in 2002-03 and judging by the performance of the equity markets since then, they would have gained too.

Tilted towards low-risk

Over the past decade, investors have lapped up small savings schemes in an unprecedented manner. Investments in government securities and small savings scheme rose at an annual rate of 30 per cent. Investors have also courted less-risky investment options such as bank term deposits and insurance schemes.During the same period, gross investments of households rose only at a rate of about 16 per cent. In particular, investments in small savings schemes have shot up after March 1997. It was only in 1997 that many non-banking finance companies, mutual benefit funds and plantation companies defaulted.

Deposits in non-banking finance companies have since slumped. In contrast, household investments in equities have risen at a paltry rate of about 0.3 per cent per annum. But after remaining on the sidelines since 1994-95, household investors did invest in equities in 1999-2000. In that year, household investments in equities rose by more than double. That, however, was hardly the time to savour equities. In the following year, household investments in equities witnessed a decline of nearly 40 per cent.

Security selection

Losses suffered by investors in equity investing underscores the need for security selection. In developed countries, investment in a particular asset class was enough to generate returns. In India, however, it is not enough to invest in a particular asset class. Investors also need to be careful in their selection. Irrespective of whether it was equity or debt, investment in an improper security would have destroyed wealth.

For instance, investments in equities. Over the past decade, Nifty has risen at an annual average of only about 6 per cent. Broader indices tracking stocks have notched up marginally higher returns. During the same period, a bank term deposit would have delivered more than 10 per cent. So, if you had not invested in stocks such as Infosys, Hero Honda or a Ranbaxy, chances are that the returns to equity investing would have been poor.

Selection is important even in the case of mutual funds. Morgan Stanley Growth fund has recorded appreciation of only 8.9 per cent. In contrast, a fund such as Bluechip or Prima have delivered annual returns of about 22 to 27 per cent. Even in the case of debt funds, a preference for US-64 or UTI's monthly income plans may have cost investors dearly. Thus, the need for security selection is likely to be even more enduring in the years ahead.

Apathy to mutual funds

The most striking feature of household investing has, however, been their apathy to mutual funds. It is, however, apparent that this apathy towards mutual funds has not been rewarding for investors. In equity as well as debt investing, returns generated by diversified equity and debt funds were larger than direct investment returns.

It is quite likely that investors may be more receptive to the idea of investing in mutual funds. That may be needed if only to gain exposure to asset classes such as real estate or commodities and also for innovative products such as junk bonds, asset-backed securities or credit-enhanced products. More importantly, that may be the least expensive way of building and managing a portfolio for household investors, even for investors who can write out a cheque for a few crores.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Fixed-income investing — Fading glitter of debt

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line