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Best Asset Class: Equity - Axis Direct
Oct 23, 2019 | Source: AxisDirect-O-Nomics
Equity is the best asset class despite economic uncertainties
The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.
The equity markets seem to be in a delicate situation with uncertainties looming both domestically and globally. On the domestic front, signs of a slowdown in the economic growth, uncertainty over the general election outcome and a slew of subdued quarterly earnings have caused volatility in the markets. While on the global front, escalating US-China trade war woes, uncertainty over Brexit and slowdown in the Chinese economy have added fuel to the fire. So, what should an investor do to preserve his capital and gain from his investments? One would suggest to invest in safer asset classes and stay away from equity due to its volatility. However, we believe that despite global and domestic uncertainties, equity still remains the best asset class over the long term.
Long-term performance of equities
Equity has been the best performing asset class on a compounded basis in the last 3-4 decades. The other asset classes viz. gold, real estate, fixed deposits and debt instruments, too have provided good returns, but have been lackluster as compared to the returns of the equity. If we see the returns for the last 40 years, the fixed deposit has multiplied wealth by ~26 times, gold by ~32 times, real estate by ~100 times, while Sensex by an extraordinary ~375 times. The CAGR for equity investments in the same period has been ~16%, which is more than any other asset class. Fixed deposits and debt instruments may be considered as a safer investment compared to equity, but, considerably lesser returns than equity.
Equities always bounce back
Equities are an investment for a long term perspective. During the times of global or domestic turmoil, we might observe a high amount of volatility in the equity market, but the market has proved to have the ability to always bounce back. In FY2002-03, during the dot com bust, the equity markets fell by about ~13%. The situation, however, reversed in the next financial year, with equities rising ~83% and all other asset classes giving lackluster returns. This has been true for almost all major crises seen over the last three decades. Equity remains the asset class with highest returns in the past many years (though not in a secular form) and it is expected to continue its run as the best asset class in the future. One should, however, not put all eggs in one basket. It is therefore advisable to diversify among various asset classes.
Right investments can unleash the power of equity
Equity markets have historically delivered higher returns over the longer term than other asset classes and the outperformance, in the long run, is likely to continue in the future. With India being one of the fastest growing economies in the world and equities markets being directly proportional to economic growth, we believe equity has a long way to go. However, an investor should keep a few things in mind. First and the most important is that equity investments are for a longer duration of time. In the short term, during periods of uncertainties, it might remain volatile; however, in the long run, it has a high probability of outperforming the other asset classes. It is also important to do thorough study/ analysis of a stock before investing; in long term horizon, the most important thing is the fundamentals of the company which reflects in the performance of the stock. In short, invest in companies with sound fundamentals with long term growth prospects. Always keep your investments diversified. In the times of economic downturn, one should invest in SIPs or invest in a staggered manner to avoid the short term market volatility and to time the markets.
Equity investments are the best mode for fulfilling your long term capital requirements. So, we advise investors to continue believing in equity and stay invested.
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