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Equities: Increasing acceptance

Jan 8, 2004

The year 2003 had been an extremely good year for the Indian equity markets. There were widespread expectations that given the fundamentals of India Inc, the northbound journey of the stock markets is likely to continue. Although the stock markets did oblige, the magnitude of gains must have left even the most aggressive of investors surprised. After all, appreciation of the benchmark index to the tune of 73% in a single year is indeed an extremely rare occurrence. Against this backdrop, we conducted a poll on our website asking the investors the following question, 'In 2004, you will give higher allocation to Equity shares/ Fixed income Securities/ Gold. The results are as follows.'

In view of the performance of the stock markets, it was highly improbable that equity shares would lose out to anyone. Therefore as expected, an overwhelming 78% of voters prefer to park their funds in Equity markets. 14% of the voters would like to go for fixed income securities and only 8% of the voters would like to opt for gold as an investment option. We shall now briefly discuss all the three investment options.

History suggests that over a long-time horizon, equity investments have always outperformed other investment avenues. But the investors have to have the longer-term perspective in mind and not get lured by the greed of short-term gains. Also, since equities give higher returns than other investment avenues, the risk associated with investing in equities is also on the higher side as during a recession, equities may be the worst affected. Moreover, investors also have to bear in mind that during a bull run, risk profile of equities remain the same and they should not commit the cardinal sin of investing in a company on the basis of rumours. Thorough research of the company in order to gauge its fundamental strengths is as important in a bull market as in a bearish market. This piece of information if followed, will go a long way in insulating an average investor from the vagaries of the market.

Gold has never been considered as an investment option by a retail investor in India. However, with the recent increase in the gold prices, there has been an increased interest for this yellow metal. A lot of reasons have been put forward explaining why gold should be part of an investors portfolio. One of the most important reasons is that gold acts as a hedge against inflation, a situation where the value of currency is eroding. This 'characteristic' of gold exists because the price of gold is impacted by factors that are usually distinct from factors affecting other more popular instruments like bonds. Gold prices witnessed an increase of around 14% in last one year. However, we cannot compare the returns of gold directly with equity markets because it is a different asset class altogether. We believe, it should form a part of one's portfolio, however, the percentage of allocation of funds is subject to vary according to different age classes.

Fixed income securities
On the other hand, fixed income securities (FIS) are relatively less risky. The movement in the fixed income securities is subject to change in the interest rates. Interest rates and the FIS prices have an inverse relationship. In last few months, the returns given by fixed income securities have been lacklustre to the extent, that in some months the returns have been negative. The one big advantage of investing in fixed income securities is that investor is assured to what amount he is going to get after a particular period of time. So one can match the duration (duration is the time period for which one can invest his funds in the market) of his requirement with the duration of the particular security he is buying. So we can say that there is lot of surety as far as cash flows are concerned. We believe that in medium term, while interest rates may go up marginally, the long-term bias is likely to remain soft.

We conclude by saying that though returns given by the stock markets in last one year have been phenomenal, it seems that markets have factored in lot of future growth. Fresh exposure at current levels should be undertaken only if the investment horizon is long term in nature. As far as gold and fixed income securities are concerned, it goes without saying that these instruments should be a part of the portfolio of any investor. The allocation of funds, to these asset classes, however will depend on the risk profile of the investor.

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