Undoubtly today, Indian Investors are heavily invested into equities as an asset class, thanks to formalization of investments ecosystem and extensive campaigns run over media such as 'Mutual Funds Hai To Sahi Hai' , 'Soch Kar... Samajh Kar... Invest Kar...', & 'Invest through SIP' to name a few.
With HNIs who have seen various cycles until now, this scenario may be different, but among upper middle class & middle class investors today, most investors are seen heavily tilted towards equity as an asset class, few as high as 90%. The situation becomes more precarious for few investors who also have real-estate on mortgage, and hence most vulnerable towards deep deep cuts in their portfolio.
It also bring onto fore a very important question that why diversification of asset classes is very important. It also becomes very important to investors to review not only CAGR (Average Returns) but also aspects like Volatility & Individual Risk Profile, before deciding which asset class one should invest into.
Let us look at few important statistics over the period of last 20 years to understand more objectively.
CAGR (Average Returns) on certain time scales
The table above must open up eyes of every investor. It clearly indicates that no one asset class provides optimal returns over all time periods. Anything greater than 10 years, returns in Gold & Equity are largely equivalent while for short term periods such as 2-10 years, all asset classes have given almost similar kind of returns. Now as an investor who is not a financial expert, it is wise to keep its allocation balanced over various asset classes and do not tilt too much towards one asset class.
Volatility in Asset Classes
Over a period of 20 years, Average Movement in prices is seen maximum in equity which is around 25% per annum, while for Gold it is 13% which clearly reflects that Equity should be the preferred medium for investors with high risk appetite, and not for ones who have long term mortgages on their head. It doesn't mean that investors should either heavily invested / do not invest in equities but proportion of investments can be adjusted according to one's risk appetite.
Also, if we compare yearly returns for Gold vs Nifty vs Bond Yields, Equity outperforms other asset classes in 9 out of 20 times in last as many years, which indicates that equity usually outscores other asset classes, but due to high volatility, there are years in between when it dips more than any other asset class.
So from now on, if you get a sales call from a mutual fund distributor or stock broker, do ask him about other products as well, apart from usual Large Cap, Multi Caps and Small Cap Funds. Also, do your own risk profiling and measure how much you should invest in a particular asset class.Don't forget an old saying 'Do not put all eggs into one basket.'
Happy Investing!
