Rajeshwari Adappa | Tuesday, 24 November 2015 – 6:50am IST | Agency: dna | From the print edition
Defensive investment strategy of choosing secure and safe investments over riskier ones give lesser returns in the long run. The allocation to FDs and gold is much higher in India when compared to developed countries and the ownership of equities is very low. To get more bang for their buck, investors need to change their investment strategy as a few decades back, there were not many alternatives and inflation was not a known devil
For the same corpus invested in retirement funds, Indians make lesser money than their western counterparts.
Yogitaa Dand, financial advisor (associated with DSP BlackRock’s Winvestor initiative for women) says, “Yes, I do agree that Indians are not earning as much as they should from their investments, and hence, they do retire poorer than their foreign counterparts.”
“The reasons are manifold. However, the two distinctive reasons are that till date Indians have always given least priority to their retirement corpus and the greatest priority to the education of their children,” says Yogitaa.
Thus, Indians end up dipping into their nest egg, reducing the corpus considerably.
“Secondly, they have been more conservative in their investments, choosing secure and safe investments over riskier ones, which would otherwise have given them better returns in the long run,” adds Yogitaa.
A leading fund manager blames the “limiting thought process” for the comparatively poorer returns on investments. Indians use a ‘defensive’ investment strategy that lays too much stress on the ‘safety’ aspect.
“While we Indians have been very smart savers, unfortunately, we have not been the best of investors with our focus being on secure and assured return vehicles, eventually giving us lower returns,” says Yogitaa.
According to Vaibhav Agrawal, VP & head of research, Angel Broking, the reason for the lower returns on investments is that “the allocation to fixed deposits and gold is much higher in India when compared to developed countries. Also, the ownership of equities is very low in India.”
“In the US, the amount invested in equity mutual funds is $8.3 trillion (approx. Rs 550 lakh crore) and the amount in bank deposits is $10.4 trillion (approx. Rs 690 lakh crore). In India, the amount invested in equity mutual funds is Rs 3.8 lakh crore while the amount invested in bank deposits is Rs 89 lakh crore,” points out Agrawal.
Over a long term period, it has been seen that equity investments have given higher returns than bank FDs. “The compounded return from the top 50 schemes of equity MFs is in the region of 14.5% while the post-tax return on FDs is 6.5%,” says Agrawal. Even if one were to invest in the Nifty stocks, the returns would be in the region of 12% without dividend, and with dividend, the returns would be 13.5%.
Certified financial planner (CFP) Gaurav Mashruwala explains the reason for the bias towards FDs and other ‘safe’ investments. “Indians have seen very high interest rates in the past. The PPF fetched a return of 12% while bank FDs earned about 15-16% and company deposits earned even more at 21-22%,” he says.
“We also need to understand that a few decades back, we did not have many alternatives and choices to investments. Also, inflation was not a known devil,” adds Yogitaa.
Another reason for the ‘safe and defensive’ strategy seems to be the lack of a social security system in India. “We can look at NPS as an alternative to the social security system. However, it cannot be a complete substitute to the same,” points out Yogitaa.
But the volatility and unpredictability of the stock markets is the main roadblock in the case of equity investments. “Equity investments need a different mindset, much like that of a businessman,” points out Mashruwala. Not all investors are comfortable with the rollercoaster-like ups and downs of the stock markets.
The good news is that the scenario is changing. “People have started investing more in equities. The psychology of the investor and the regulator too is changing. Even the provident fund money is now being invested in equities,” adds Mashruwala.
If Indians want to get more bang for their buck, they need to change their investment strategy. “A person with a low risk investment portfolio can earn anywhere between 5-8% while a person with medium risk investment portfolio would earn approximately 8-10%. A person with a high risk investment portfolio would earn anywhere between 12-18% on a CAGR basis over a period of time,” explains Yogitaa. After all, risks and rewards are but two sides of the same coin.
Incidentally, Mashruwala is not too concerned about the western counterpart getting higher returns. “Remember, in all probability, the western counterpart also has more debt compared to the average Indian. It is highly likely that the Indian probably owns the house unlike his western counterpart,” says Mashruwala.
Source : http://goo.gl/hHcZR3