Tuesday, April 24, 2012

>STRATEGY: THE POWER OF EQUITIES- 16 companies' dividend in FY2011 was greater than their market value in FY 2002

Investors have several instruments to invest their surplus funds. Some of the popular avenues include bank fixed deposits (FDs), gold, postal saving schemes, mutual funds, real estate, insurance, and equities. A comparison between these set of instruments on the basis of risk and reward is common. For instance, over the last 10 years, bank FDs would have generated a return of 115.9% (point to point gain) assuming interest rate of 8% per annum and the principal amount plus interest earned for one year is reinvested at the end of every year. As against this, investment in gold would have returned 458.9% over the last 10 years.

In comparison, the Indian stock market barometer, the BSE Sensex, would have provided return of 400% during the same period. Now for small and retail investors, the relevant question is whether it is sensible to take the plunge in equities for the extra gain of 285.8% compared with FDs where returns are almost certain. Measured against the second option, that is gold, equities have underperformed by 57.2%. Does equity investment make sense?

First of all, as a basic principle, one instrument of investment cannot be pitted against another. Each of these investment instruments has its own pros and cons. In fact, different features and risk and return profile make them complementary rather than competing investment instruments. The real question should be how much of surplus funds should be invested in each of these instruments.

How much to invest in which the instrument is governed by factors like risk profile of the investor, which largely depends on his age and objective of investment, future fund requirement, and investment horizon. Equities have their own charm as they have the potential to generate manifold gains over the long term.

To read report in detail: POWER OF EQUITIES