By Abhishake Mathur | Apr 08 2015 | MyDigitalFC.com

Equity has always outperformed all other asset classes in the long run, across economies, including India. In the past 15 years, BSE Sensex has delivered a CAGR (compounded annual growth rate) of 11.50 per cent. Even if we were to make staggered investments — say for example Rs 1 lakh per year from January 1, 2000 for a period of 15 years — an investment of Rs 15 lakh would have grown to Rs 53.84 lakh as on December 31, 2014.

Investment vs investor returns: Despite the performance of equities, the perception of such returns among investors is far from its potential. There is a wide gap between investment returns (the return generated by equity and sometimes shown by performance of the indices like Sensex and Nifty) and investor returns (the actual return that an investor realises on his equity-linked investment). A recent study on investors in the US by Dalbar has shown that investors earn about five per cent less per year on an average. The investor experience is no different in India. The Sensex as an index has given a CAGR of 11.50 per cent in the past 15 years, as mentioned earlier. This is actually the average return that investors should have got during this period. However, this is not generally the experience that is talked about. Unlike the success stories of investing in real estate that are often talked about, equity investments are not discussed as much. Clearly, the reason is a wide difference between the actual experienced returns and the potential returns.

Handling of equity investments: The actual reason of why investor returns do not reflect the investment return is related to the way equity as an asset class is handled and the purpose for which it is invested in. The value of equity investment changes every day, there is almost a compulsive urge to track it every day. This, in turn, evinces emotions — sometimes to buy more, sometimes to sell prematurely, sometimes to overexpose the portfolio to equity, and at times, to completely exit, never to invest again.

No doubt, tracking of investments is important. However, taking any action should be backed by information and should be conscious. Decisions that are based on emotions are laced with biases and that is the reason why investor’s returns fall short of the actual potential returns of an investment, specifically in equities. Most investors who have done well have held their investments for long terms and, have not allowed their emotions impact their actions.

The other issue is that equity is also perpetual in nature, having no maturity date as such. Therefore, unlike a fixed deposit, where a decision has to be taken to invest maturity proceeds, in equities there is no particular time to review. This does create confusion in the minds of investors about when they should review or exit. The fact is, equity should be treated as an exposure rather than a product, and should be rebalanced rather than redeemed at regular intervals.

Purpose of investment: Equity investments are also seen as speculative investments. They are attached with a perception of doubling or tripling money quickly and not always as a means to create long-term wealth. The average holding period of equity investors is very short. For instance, the average holding period, in case of equity mutual funds, is under two years for 50 per cent of investors, as per the data by Amfi. In fact, a quarter of them have an average holding period of six months or less. The recommended purpose for which equity should be chosen as an investment is quite the contrary.

The longer you hold your equity investments, greater the return, since the volatility smoothens out as the holding period increases.

Budget 2015- NPS: The national pension system (NPS) has been given impetus by allowing an extra deduction of Rs 50,000. In addition, the budget proposal would allow employees to choose between NPS and EPF for their retirement corpus. These changes will move a part of long-term investments into equity and will also ensure that the investments are not redeemed frequently, so that investors can benefit from equity investments fully. It is also likely to have a multiplier effect as more investors become comfortable with the uniqueness of equity investments. These changes are not just important for channelising individual savings into creation of capital for businesses but also for individual investors to doubly benefit from the growth of the Indian economy.

(The author is Head – Investment Advisory Services ICICI Securities)

Source : http://goo.gl/IXlWMp