Equities are still an investor’s friend
The primary target for a long-term investor is to beat inflation - anything more is a bonus. The first difficulty for an Indian investor is that we don’t have reliable longterm indices for inflation. However, we do have prices for various goods that have remained in common usage across the past 40 years.
The retail price of petrol in December 1973 was ~1.65/litre. It's in the band of ~69-70 now, which works out to an inflation rate of about 10 per cent for fuel. The price of mutton in 1977 was ~10/kg, it's about ~375 in Delhi now. Again, that's about 9.5 per cent.
Given that food, fuel and FMCG prices have seen this sort of long-term inflation, an investor probably should assume that inflation will run close to 10 per cent over the long run. In that case, a worthwhile investment should return around 12 per cent to keep some margin of safety.
We can rule out vanilla debt as an option if 12 per cent is our target. The State Bank of India provides a list of term deposit rates historically on its website, going back till the mid-1980s. The averaged interest rate for fixed deposits (FDs) in the one year or longer tenures is well below required range. (Although inflation has dropped below five per cent now, it was ruling at 14 per cent in 2009 and above 11 per cent in 2012-13.)
In fact, FDs consistently yield returns at below the ruling inflation rate. Debt funds do have periods of strong capital gains, but the high returns only occur when interest rates trend down and the fund's portfolio appreciates.
Gold offers an interesting perspective. The official price was ~490 per 10 grams in December 1977. It is at about ~28,475 on Tuesday. That's a 10 per cent CAGR. However, as anyone who's watched old Bollywood movies knows, gold was actually available far cheaper than the official price. The smugglers became folk heroes because they delivered assayed gold biscuits from Dubai, avoiding prohibitive customs duties and import restrictions. But, even after the Gold Control Act was abolished in the early 1990s, the numbers indicate that the precious metal delivers 10.5-11 per cent per annum.
Appreciation from real estate is hard to assess. It is too localised. For example, land along the alignment of various metro lines has seen extraordinary appreciation in every city where a metro has been built. But, there have also been large regions where prices have stagnated and long periods when prices have moved down.
Equity is pretty much the only asset that has returned this sort of long term appreciation. If we look at the Sensex, from its base of 100 in April 1979 to the current value of 33,700, the CAGR is over 16 per cent. That's a truly extraordinary premium for equity.
However, that premium has reduced a lot in the 21st century. Since December 2000, when the Sensex was held at 3,970, it has returned just over 13 per cent. Since 2010, it has returned over seven per cent, which is well below target. Even in the last three years, the return works out to just over seven per cent, the Sensex was traded at 27,500 in December 2014.
This presents an interesting problem. In the very long term of 15 years or more, equity does present the sort of returns you need. It may disappoint across shorter time periods, even held through substantial tenures.
However, no other asset class seems to offer the sort of returns that reliably beat inflation.
The retail price of petrol in December 1973 was ~1.65/litre. It's in the band of ~69-70 now, which works out to an inflation rate of about 10% for fuel