Good Ole Debt!

These days,equity investors are laughing their way to the bank because Sensex has generated 44% returns during the past one year. While the benchmark index has generated this return, there are several stocks that have risen by more than 100% during the same period.So, it’s natural for investors to get carried away when Dalal Street is on a roll, and the Sensex is making a habit of hitting record highs almost every other day. Suddenly, retail investors are flocking back to the market if inflows into equity schemes and the number of demat accounts opened recently are any indication.But here lies the catch: retail investors who are entering the ring now may not get the kind of returns from equities as seen in the recent past.

In some instances, it also doesn’t make much sense being a long-term investor in equities. A look at the Sensex returns chart in the past 20 years could be a bit disappointing even for a hard-core investor. The Sensex closed at 4,588 in August 1994 and despite being at a lifetime high of 26,420 now, it has only generated a mediocre annualised return of 9.15% during this 20-year holding period. Several debt products, like the Public Provident Fund (PPF), have generated better annualised returns of 10.46% in this period.

Though the difference looks small in percentage terms, it is actually big in final value. While the Rs 10,000 investment in Sensex at the end of August 1994 grew to Rs 57,520, the same amount invested in PPF at that time has grown to Rs73,124. This is not to say that the PPF is a better option than equities at all times, it just reinforces the fact that timing is critical in the capital market. Despite the recent rally, Sensex’s annualised return for a period of seven years is only 8.10%, if you have entered at the fag end of the previous rally (i.e., in August 2007).

In case of debt products, all investors get basically similar returns, in case of equities, a small minority of people win big time at the cost of the majority. So talking of averages in case of equities is nonsense.