WHY EQUITY WILL GIVE BEST RETURNS IN NEXT 20 YEARS.

Since January 2008 when the Indian Markets were at dizzying heights of 21000 , the market has corrected over 55% and is hovering at 8500 today. There are lot of people who have lost tons and tons of money in equity from the markets peak. But, unless they entered in January 2008 in the market, they may not have lost that much. Also people who have been investing for over 4-5 years ion the market still have their capital intact even at these low levels. So much loss of wealth over last 12-15 months has set a sense of dejection and hopelessness towards equity markets. Is this correct or this hopelessness is overdone?

Should we be shunning equities for ever?or is there still some merit in it?

My take on this is that while its true that equity markets have not performed well in last 12-15 months , we can not forget that this market over a period of last 5-6 years has still given handsome returns to all its investors. The bull run from 2002-2008 has been nothing short of exceptional where people made huge amount of money. The returns generated by equity markets were far superior than any other investment option available. So when going was good people loved it , everybody and his uncle wanted to put money in equities. Now when the tide has turned people just abhor equities. Both of these are extreme reactions. Equity markets have their own boom and bear market cycles and one needs to play around it.

I am sticking my neck out and saying that in the next 20 years , equities will not only give better returns than others, they will give the best return that one will hope to get from any investment tool. Why do I say so? There are plenty of reasons which suggest that it will turn out that way.

1. Low Equity penetration in India

Equity markets get only about 1% of the total savings in India, whereas in developed economies this percentage is 25%. Imagine if we were to reach that kind of equity penetration , what impact it will have on our markets. More money flowing into equity markets will take it to greater heights. Boom in any equity market happens when there is more money chasing fewer stocks and with equity penetration in India bound to go up from here, the equity markets too will follow suit.

2.Entry of Pension Funds in Equity Markets

In India, till now , the regulators had not allowed pension funds to be invested in equity markets. they were mainly invested in Gsecs and debt instruments.But now with companies managing pension fund being allowed to invest in equities , it will throw open floodgates of cash into equity markets in near future. The New Pension Scheme is slated to be implemented with effect from April 2009.

3. India's long term growth story is intact

As per Goldman's report , India is slated to be among the largest economies of the world by 2020. India is currently the second fastest economy in the world and its growth story of likely to continue for another 10-15 years atleast. Higher growth in the economy will mean more savings , leading to more investments in equities. It will also bring in FII since high growth economy always attracts huge FIIs. Infact last bull run (2002-08) was partly due to huge FII inflows.

4.Ridiculously low valuations at the moment

Since return on equity investment depends on the purchase price or entry price of the stock. The market is trading at ridiculously low valuations. There are blue chip stocks trading at multi year lows , which is a great opportunity for people to invest in them now and reap the benefits when the market rebounds.

5. History repeats itself

Lastly, the history of equities will clearly tell you that this is where you will get the highest returns over a long period of time. Look back at the equity market's performance over any 15-20 year period and you will know what I am talking about.The BSE sensex gave compounded return of 16.9% between 1979 -2005. That kind of return compounded for 26 years is a great return by any standard and is unmatched by any investment tool available currently.

And there is no reason why it will not be same again.

So Friends, take your bet on equities and I am sure you will be happy to have made that decision when you will be busy enjoying your pension or funding your kids education out of this investment.

Stay wise n Stay wealthy....