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Poll: Equities vs ...

Nov 12, 2003

Equity returns have probably beaten all asset classes in FY04 to date. The indices have risen, almost in a single breath, to cross some crucial psychological levels and have attained highs, which were last seen during the tech boom in early 2000. At the same time, the trend of falling interest rates has slowed down in the recent past, which has led to a rather relatively lackluster performance for debt market players.

Amidst the above backdrop, Equitymaster conducted a poll in order to find out as to where would investors park their money at the current juncture. The result of the same can be seen in the chart above. While 65% of the votes were garnered for equities, fixed deposits managed to get hold of the second spot with a distant 19% votes followed closely by debt at 16%. Now, here the surprising part was not that equities got a major chunk of the votes, but the fact that fixed deposits were preferred over debt was a 'little' surprising.

Equities have been on a joyride the world over in FY04. And we feel that the growth prospects of India Inc. and consequently Indian equities are much stronger than it was ever before. The slowdown in the economy over the last couple of years has helped Indian corporates emerge as a much stronger contender at commanding greater recognition and a higher share in global trade. Further, with domestic external factors like a soft interest rate regime, huge forex reserves, improving infrastructure, sectoral reforms and cost cutting measures (internal factor) without compromising on quality, all augur well for the economy and the corporate sector to grow. At the current juncture, we feel that the above-mentioned positives far outweigh the negatives (fiscal deficit, political instability, etc.) and as such, we feel that equities will continue to remain a high-rewarding asset class, albeit only over the longer term.

Now, let us consider another investment option fixed deposits. Fixed deposits had been one of the most preferred investment avenues until two things happened - one, the interest rates started to fall and two, equity markets started to rise. It must be noted that fixed deposits have been the preferred option for reasons like safety and liquidity. These two qualities can be attributed to a low-risk investor, for whom, the safety of capital is of utmost importance coupled with a definite capital appreciation. Of course, these two characteristics cannot be a surety in equities. However, it is definitely possible to minimise the possibility of a loss of capital and also make sure that your investment into equities or debt would assure of some respectable return.

Equities are a relatively better option for an investor with a long-term horizon and, if we may say so, a longer-term view could even mitigate the risk factor to a certain extent. The case for 'not' investing in fixed deposits becomes even stronger when we consider the fact that while a fixed deposit gives a return of 6% p.a., much of the gains are negated due to the 4.5%-5% inflation, thus leaving a mere 1% real rate of return for the investor.

Finally, we now consider the third option i.e. debt. Debt markets had been on a roll until a few months back when the interest rates were falling steadily. The fall in interest rates led to capital appreciation in government securities (and consequently NAVs), which resulted in the super normal returns from this asset class. However, while the Indian central bank has re-asserted the fact that the soft interest bias will continue, the question arises as to how much of a further downside is possible in interest rates.

In major world economies, the interest rates are already at their lowest, leaving little and in some cases, practically no scope for a further cut in interest rates. On the domestic front, while there 'could' be some more downside for interest rates, it is difficult to believe that the current low interest could continue for a longer period, especially with the economy expected to grow at over 7% and inflation hovering around the 5% mark. In fact, Reserve Bank of Australia has already increased interest rates in the recent past. So, while investing in debt cannot and should not be ruled out, one should not expect double-digit returns from the same.

In conclusion, while the investment option ultimately depends on the risk profile of an investor, we feel that in the current scenario, with a marginally higher risk, investments in equities would be the best of the options. However, here we would once like to advise our readers that investments into equities has to be in a systematic and planned manner. Moreover, stick only to those companies, which not only have a trustworthy management, but also a sound and viable business model.

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