Investors are often on the lookout for the best-performing asset class — with their choices spread across fixed income instruments, like Public Provident Fund (PPF) and bank fixed deposits (FDs), precious metals such as gold and silver and the equity market.
The long-term historical trend shows that equity tends to outperform other asset classes over 15, 20 and 30 years. But should investors then look to buy the benchmark index or the broader markets?
Well, the answer lies in diversification. Since a broader market index has a wider selection of companies, it has managed to beat benchmark returns.
Data shows that between 1995 to 2005 (till June), Nifty 500 has delivered a massive 15.2% CAGR earnings vs 14.1% rise in Sensex and 12.5% in gold. Meanwhile, PPF and FD returns are at 8.1% and 7.2%, respectively.
The picture remains true over 20-year and 15-year periods too.
“Equities do tend to perform best over longer periods of time and tend to provide 14-15% CAGR over 20-30 years for a broader market index such as Nifty 500 which is comparably higher than fixed income or gold as they provide 7-8% (fixed income) and 10-11% (gold) for same time periods,” said Vaqarjaved Khan, CFA, Sr. Fundamental Analyst, Angel One.
Why do equities beat other asset classes?
He attributed the rise in the equity market to the fast-growing Indian economy, along with rising corporate governance and profitability of Indian companies, and strong retail and institutional flows.
“All these factors contribute to equities doing well in the long run as investors get rewarded for the risk borne by them,” he said.
Undoubtedly, gold’s recent massive nearly 28% rally this year has brought it back limelight. However, data shows that over the years, equity has either given competitive returns or beaten the yellow metal.
Rajesh Cheruvu, MD and Chief Investment Officer at LGT Wealth India, said that gold has indeed delivered attractive long-term returns, averaging 11–12% with lower volatility than equities, and has proven to be a reliable diversifier since it is largely uncorrelated with equity or fixed income.
However, he feels that gold remains essential for diversification and risk management, but equities will continue to anchor long-term wealth creation.
Ideal portfolio allocation
Analysts are quick to point out the volatile nature of the equities as well, saying that in the short run, investors face greater risk.
“Over longer periods of time equities provide higher returns, but they are highly volatile during shorter tenures on account of inherent risk among them,” opined Khan, thus recommending that investors balance their portfolio with low-risk asset classes such as gold and debt.
Portfolio allocation for any investor depends upon their investment horizon, risk appetite, age and income stability.
Therefore, an aggressive investor in his 20s/30s can afford to allocate a higher portion of his portfolio towards equities as he has a longer investment horizon and can take on risk and volatility that comes along with it and has less income needs from the portfolio, said Khan.
For a young investor, he advises 70% allocation towards equities (40% in Nifty 50, 15% in Nifty 500 and 15% in Mid-cap and Small-cap fund), 15% towards debt for emergency liquidity needs and the remaining 15% can be allocated towards gold ETFs, physical gold for a hedge against inflation.
“Contrary to an investor in his 60s will have higher current income needs and will find it difficult to bear the risk of volatility of equities. Hence, allocation of 15-20% towards equities will be apt for him, along with 65-70% in fixed income to cater towards his regular income needs and remaining towards gold for hedging against inflation,” Khan advised.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
