Journal of Emerging Market Finance
The age-old wisdom of investing broadly in fixed income products (bonds, fixed deposits, pension accounts, etc.), gold, and real estate is still the most preferred choice among investors, especially the retail investors. These asset classes, in fact, have underperformed equity by a significant margin over the long horizon. If we consider inflation-adjusted returns, these assets often produce either very low or negative returns. Hence, they do not help investors in growing their wealth but slowly destroy it. Despite that, for a country such as India, which has one of the highest gross domestic savings (percentage of gross domestic product) rate among other emerging countries, citizens of India hold 77% and 11% of their assets in real estate (one of the most illiquid asset class) and gold, respectively, with just only 5% in liquid financial assets as per the Housing Finance Committee in 2017. A similar pattern holds for the other emerging and even most of the developed countries with a slight difference in the choice of their assets. The main reason is that investors are interested more in protecting the nominal value of their assets rather than allowing it to grow in a volatile market like equity. Intuitively, we always prefer safe-haven assets that could give capital protection.
More often than not, safe-haven assets are government securities, precious metals, oil, and certain currencies. Research on safe-haven properties of currencies document that Swiss Franc, Japanese Yen, and the Euro have had significant safe-haven attributes from 1993 to 2008. But instruments such as currency and oil are neither easily available nor preferred investment options for retail investors. The oil price has generated a compound annual growth rate (CAGR) of 4.6% from 2008–2009 to 2017–20181 while that for gold was a mere 1.5%, whereas the CAGR of Nifty for the last 10 years was 15%. Though we can say that gold being a store of wealth is a reliable, risk-averse investment avenue and promises feasible trades, it does not yield returns as high as equity assets in comparison. While the returns from the real-estate sector in other countries are either negative or very low, in India it is around 8%. However, after the 2016 demonetization announcement, the real-estate boom has busted in India as it has generated only 2%–3% returns in the last 4 years.
With continued fall of banks’ deposit rate, bond yields, and underperformance of gold, investors are presently looking for a better investment avenue with a mix of safety and returns. They are willing to take some amount of risk to generate decent returns. Association of Mutual Funds in India data show a 23% annual growth rate of assets under management in the equity segment in 2019. Moreover, this could be one of the best times to invest in the equity market due to a cheap valuation of stocks amid the 2020 coronavirus-led financial crisis. High liquidity is one of the major advantages of equity assets, unlike real-estate. However, not all stocks in equity markets generate good returns. The majority of stocks even struggle to generate positive returns over the long horizon. Further, if unlucky, an investor could even lose their whole capital in the equity market if they choose a basket of bad stocks. Therefore, the equity market portfolio needs to consist of good quality stocks, which could possibly generate decent returns with minimum risk.
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