Returns from asset classes: Creating wealth
R Balakrishnan | 27 February 2014

 In this column, I have made an attempt to examine various asset classes and how they have performed. I have not included real estate as it would vary widely, even within the same city. In equities, I have given the index values (to indicate passive investing) and also taken an actively managed equity fund. I have chosen HDFC Top 200 Fund, as it has a longish history and size. Also, it is not purely large-cap or mid-cap oriented, though, given its present large size, surely finding new stocks to invest in meaningful volumes would be tough. Yes, the choice of funds would make a difference to the performance, since nearly half the existing equity diversified mutual funds underperform the index. I have added gold and silver as the other assets that are being encouraged and talked about.

Of course, data can be presented in many ways and for different periods. The periods chosen can make a huge difference to the conclusions and there can always be a writer’s bias. I have tried to minimise this by measuring data at multiple reference points during a 10-year span. Hopefully, I have ironed out most of the biases. I have also managed to avoid the highs and the lows of the stock market. To this extent, I have no case to argue with anyone who says (with a glance at the rear-view mirror) that investing at the highest or the lowest level of the indices could have led to different conclusions.

I have, of course, stuck to domestic investment options only. Today, with the freedom to remit and invest up to $200,000 each year, the available asset classes expand dramatically. We can also play on the foreign exchange risk/rewards. Surely, that is an important asset class (for the rich; not for mere mortals) and Indians will seek to keep assets overseas to diversify wealth. Of course, many Indians do have unaccounted wealth overseas and they could, perhaps, tell us better about the performance of that asset class. My key takeaways are:

• Next to direct equities (specific company stocks), a well-managed equity diversified fund delivers the best results, over time;

• Timing makes a big difference to the returns. Someone who got into the markets at the beginning of 2002 has much more money on 1 December 2011 compared to someone who started off at the beginning of 2000. So, paying attention to market moods and valuations is as important as committing money to an asset class;

• Gold and silver have delivered better returns than the index, but lag the chosen fund;

• Gold has given consistently positive returns since 2002, but it is debatable whether this run will continue. So long as the world has problems and worries, gold will do well as it is simply an alternate to the dollar or the euro;

• Silver has been highly erratic and is surely much more speculative than gold;

• Passive investing in ETFs (exchange traded funds) may not be the best strategy for investment in equities;

• The most important lesson is that it takes a long time to create serious wealth. Patience is important;

• There will be very good years, very bad years and some uninteresting years;

• Traders will find it extremely tough to make money consistently in our stock markets; and

• Pray that when we need the money, the markets are in a bull phase so that we can exit high. Perhaps we should think of taking off some part of our money away from equities whenever there is a spectacular year. Or, more important, keep a constant balance between equities and fixed income. For instance, keep equities plus fixed income at a constant percentage, so that when equities rise, part of it automatically gets converted into fixed income and vice versa. A balanced fund will not work because it can never get returns like equities, in a bull market.