Rather than volatility and uncertainty, it is the lack of knowledge and ambiguity about how equities work that make Indians stay away from equities.
When we speak about equity investing, be it direct stock buying or the mutual fund route, one common thing that investors talk about is the volatility in the market!! This applies to both equity and non-equity investors. I say equity investors too, as we do receive calls from existing equity mutual fund clients when there is a fall in markets.
In my experience the reason for equity aversion is not volatility or uncertainty alone, it’s more of ambiguity attached to the nature of the equity asset class. Volatility is present in many other asset classes—be it Bond, Gold, Real Estate etc. Equity as an asset class may be perceived differently by investors, hence, they label it as volatile. The human mind is designed to follow a pattern when it comes to most decisions in life. Indians’ darling asset classes have been fixed deposits (FDs) and gold which is what Indians follow even today. I am not sure if any one created wealth by investing in FDs and gold. FDs and gold could have, at best, helped someone maintain his standard of living.
Actual wealth was created by properties and equity. Properties were owned primarily due to consumption, inheritance and difference in the transaction value and actual value. With better tax compliance, formalisation of economic activities and stringent enforcements, the gap in difference in value will eventually reduce. Property will continue to be favoured as it is also a status symbol and is meant for self-use.
What most Indians have missed out on is equity as an asset class to create wealth. This asset class created huge wealth for a few far-sighted Indians and FIIs. Most Indians could not participate in this wealth creation journey. Equity, in simple terms is owning part of business or fractional ownership. In equity participation, there are uncertainties of markets, economy, regulations, policies of nation and world. But eventually, smart investors make money from these uncertainty and ambiguities. Successful businesses get listed on exchanges and eventually go on to become part of Nifty500 Index. These are successful companies who make to the elite list steering business through rough waters. Mutual Funds invest into stocks of these Nifty500 companies.
In investments, volatility alias uncertainty is part of our life. All our life decisions are going to cause multiple effects, positive or negative, but we’ve got to live, endure and go through everything, hence volatility alone can’t be the reason for equity aversion. It’s the ambiguity that keeps investors away from participating in wealth creation through equities as an asset class.
While we all know that there are ambiguities around gold and real estate outlook, there are not enough many opinions, assessments and media coverage about gold and real estate. Let’s talk about gold- and real estate-related ambiguities. Gold prices are dependent on the US dollar, inflation, economic activities and new discoveries. Plus, like equities, prices change every second but we hardly read or hear about the same. For real estate, the ambiguities are related to project viability, titleship, statutory clearance, local municipality clearances, delays in completion of project, transfer of ownership, taxation and maintenance.
Come to equities, prices are tracked, flashed, discussed and covered extensively by the media and the social media. Investors, therefore, see there’s more volatility in the equity asset.
The simple strategy that investors can use is optimising returns from equities is assessing if over the long run, India will grow or not? Will there be growth in employment, output, consumption, opportunities and advancement in the Indian economy or not? If the answer is yes, then trust me, businesses will be the beneficiaries of the same. And if businesses benefit and grow, naturally stock prices will go up. That will help you create wealth for yourself. The only condition is: don’t pay attention to noise around you and stay on course with your long-term investment journey. Like you don’t keep a target selling price for gold and real estate, don’t have target selling price for equities too.
The views are personal and are not part of the Outlook Money editorial feature