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Equity investing is a matter of choice, not compulsion

Monday, July 18, 2016
By Jayant Pai

Jayant Pai CFP and Head - Marketing, PPFAS Mutual Fund

You may remember the time when, as children, you were forced by your parents to eat your vegetables. When you quizzed them for a reason, they simply said "Well, you MUST eat them because they are good for you". Today, stockmarket 'experts' have taken the place of parents, by screaming to all within earshot that everyone's investment portfolio MUST contain equities. They lament that Indian investors do not know what is good for them. That is why, equities comprise only around four per cent of their portfolios.

They chide them for choosing gold, real estate and fixed income instruments, implying time and again that none of these possess the one magical quality that stocks apparently possess and that is, the ability to provide 'real returns' on a sustained basis. Some are also adamant that investors will 'be compelled' to invest in stocks. Despite so much advocacy for equity, why have Indian investors not flocked en-masse to the stock markets? Here are a few probable reasons:

Delayed feedback mechanism: All investors would like clarity on two things - (A) The returns that they can expect (B) The downside that they are likely to suffer.

Unfortunately, stocks do not offer comfort on both these aspects. Neither is the return fixed nor is there a floor to the downside. In other words, in the case of stocks, the feedback mechanism is delayed far into the future. Hence, they are less attractive.

It ain't the numbers alone: While I believe that one can choose any sample set to prove one's point, it is a fact that there are several studies that show that stocks have outperformed many other asset classes over long periods of time. The same studies prove that volatility reduces drastically, with the passage of time.

The sensory aspect: For many investors, the term 'investment' should connote something 'solid'. Unfortunately, to many, stocks are mere pieces of paper. In other words, you exchange one piece of paper (that is, money) for another.

Look who's talking...: Stock market 'experts' often counter the above apprehension by saying that stocks must be held for the long-term. But time frames of short, medium and long are too nebulous for most investors.  

Lack of peer pressure: Investors are often driven by the 'Herd Mentality'. If your friends and acquaintances have been making money in gold and real estate and 'preserving' their capital in fixed deposits and bonds, you would prefer to follow them rather than be the outlier in the group.

Indifferent to cash flow: Sure, most purists do not treat gold bars and locked-up apartments as 'investments' as they do not generate any cash-flow. Also, on many occasions, gold and real estate serve as better collateral than equities while borrowing.

All this does not mean that Indian investors will shun equities forever. Sustained communication on the merits of equity investing through the Systematic Investment Plan route, by the Indian MF industry could result in increasing to a bite-sized chunk in due course. However, this may happen due to more mundane asset allocation considerations, rather than any 'compulsion'.

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