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POSTED BY ON January 26, 2013 11:25 am COMMENTS (17)
I have a general query:
In one of the posts by Manish i saw a quote, “in the long run (30 – 35 years) mutual funds (equity) outperforms all other assest classes”
Is this true even for MF vs investment on land/flat (excluding occupied flat)?
If so, does it really mean MF investment (equity) is the best investment option available?
Is there any other option that outperforms equity?
Please share your thoughts
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Dear Vikash, the original discussion was started from 30-35Y term & you squeezed it to 18Y. The nos. can not tell the truth. We can manipulate the nos. as per our choice. Just of rsake of reference, look at the TRI of Sensex from 31st march 2003 to today & compare it with Gold return in the same period.
Do you know, prev. also Gold in international market had crossed 1500 USD/Oz barrier. Somewhere in 1981. It took almost 30Y for Gold to return to it’s prev. peak. Someone’s Food is someone’s poison. Eq, may suite some one, Gold ‘ll do good for some other & real estate ‘ll do for some other.
At the end of the day, it’s personal choice from where we are getting or want to create our wealth. Also the comparison of Real Estate with Sensex or Eq. return is not good. Just do tell me, how much real estate you can purchase for 50000 Rs. or 100000 Rs.
I’m not at all advocating that every body should only invest in Eq. My point is to have a balanced meal.
Thanks
Ashal
DEAR ASHAL
thanks for final remark u have given,just tell me what should be balanced meal or else what % of investment should go in real estate after concern that real estate is bit risky illiquid .
thanks
dilip lalwani
Dear Dilip, it’s a personcal call, how much one wants to allocate in different asset class.
Thanks
Ashal
@ Ramesh
1> Gold and Benchmark Sensex/Nifty including dividend gave similar kind of return in last 20 and 10 years Gold has outperformed in last 5 years. In Addition, Gold is less volatile and one can sell and turn into cash whenever you need. Not possible in equity due to volatility.
2> As far as Real-Estate and Equity market is concerned, On contrary i think one need little and one time research in real-estate. Yes, luck do play very important role in any investment. 20 years back, If someone invested in Reliance Growth fund and bought a risky property or if one bought a 3BHK flat in Gurgaon and invested same amount of money in few equity funds of SBI, UTI. Difference would be huge in both the cases.
3> For every multibagger stock, there are many so companies that were delisted from exchange or trading at same price even after 10 years. Almost all properties in Delhi/NCR returned close to 18%-20% CAGR in last 20 years which is not the case in equity market as only a section of companies perform. There is a reason why half of the funds has performed poorly. As i said, What was good 5 years back are not always good in equity.
I am not negative on equity. In fact, I have invested my 80% money in equity (direct). My point is only against Mutual funds as it is considered as best asset class in long run which is not true. MF has many restriction. They don’t buy when market is at lower level due to fund inflows. Also, they buy so many stocks that it only give close to benchmark index. Their performance keep changing after every 1-3 years. How many times a common investor going to change his/her fund if invested for 20 years ? In any case, average return would be close to index. Then why to invest in MF when you have Niftybees?
IMO, It’s difficult to make anything more than 12% if invested for 15-25 years. One can make much more money by investing directly in equity (if one has proper knowledge) and Real-estate and similar return like MF by putting money in Mix of Debt,Gold, Balanced fund. One should take some risk only when return is far better !!
@ Vikash
1> You say for last 10 and 20 years, the overall return in Gold and Sensex/Nifty incl dividends is similar. Ok, let us take that as a correct statement (I have not checked because I am dead against gold for long term investment). While, in last 5 years, gold has outperformed. This also means the barring the last 5 years, for the initial 5 or 15 years, equities outperformed, since the total return is similar. Right.
Conclusion: Over long periods of time, different asset classes will give different periods of outperformance and underperformance.
2> Little and one-time research in real-estate. I seriously disagree with this. That is like saying just invest in any stock, with a little and one-time research and reap benefits after 20 years. Real-estate comes with its own set of risks. Do not think or imply that real-estate investments have no risks.
3> For every “great” real-estate investment, there are others associated with non-completion of projects, delayed transfer of property, land-grabbing, not getting what you selected for, etc. Any decent investment needs time and knowledge, be it equities, gold, real-estate or even debt instruments. Attributing skill to luck is a commonly done mistake.
I do not think, MF is an asset class. If you have got that impression, then it is a mistake in the above discussion. Equities are the asset and MF that invest in equities are supposed to be the best vehicles for normal people, who do not have the knowledge of direct investing.
Talking about restrictions:
1. “They don’t buy when market is at lower level due to fund inflows.”. Wrong. Some funds have the mandate of investing 70/85/90% of money into equities ALL the time (check Franklin Blue-chip, DSP Equity/Top 100, HDFC Equity, etc). Others have the mandate to go into cash according to market conditions (Quantum Long term equity, ICICI Dynamic, etc.). Net sell statistic by DII does not mean all the funds are selling.
2. ” Also, they buy so many stocks that it only give close to benchmark index.”. Their job is to outperform the benchmark, whether by buying the constituents or out of it is according to their mandate. They buy with a sectoral and sometimes intra-sectoral diversification. Which is pretty good way of protecting downside (of course, at the cost of upside). But downside and upside are part of the same coin and cannot be separated. Most of the active funds are NOT close to their benchmarks. And even if they, there is nothing wrong in mimicing a benchmark if you do not have ideas.
3. “Their performance keep changing after every 1-3 years”. So? You are investing for a long term, how do short-term performances matter? Does your “direct invested portfolio” outperforms your benchmark every quarter / year? Not even Buffett’s does, so, short-term performances do not matter AT ALL.
If the underlying qualitative work of the fund is consistent, then no need to change at all.
4. “In any case, average return would be close to index.” All indices are not same. Check Nifty and Nifty Junior and CNX 500. They cannot be same. Yes, Nifty and Sensex are well-correlated but not the others. In last 20 years, many funds have managed to have decent outperformance as compared to their indices. It is not necessary, that this may continue in future. But still, who knows when that will start. If you are happy with Nifty Bees, good for you.
Are you saying, that Direct Investing with knowledge (how much knowledge??) is “less risky” and provides more return than simple equity MF investments? Do you really get “less stomach churn” in Direct Investing as compared to equity MF? Chuckle !!
@FFC
A year back, I calculated from Jan, 1994 to Dec, 2011. Sensex was at 4,152 (Jan,94) and 15,360 (31st Dec,11). Return was 7% CAGR in 18 years. (I made 18 years for simplicity). If we add +/- 2 years, return would be better close to 9% or so. I don’t think, it matters when one invest for 18 years 🙂
My main point was it’s not necessary that if anyone invest in equity, return would be best. In last 20 years, Gold and Real-Estate have given much better return. In fact, Debt return are par with benchmark Index like Sensex, Nifty.
I understand the main point of your post quite well.
However for the 18 year period you mention taking sensex values on march 31st I get close to 14%
You need to recheck your calculations.
1. Use sensex or nifty total returns index and not isolated sensex values. You need to include dividends.
2. Comparing a diversified instrument like sensex with anecdotal real estate returns is not exactly the right way. Try using individual stocks that way. Try returns from say Reliance, etc, since as in real estate you need luck and knowledge, same with stocks. When there will be a simple diversified real estate investment instrument then we may compare.
3. Use similar values of returns. Like putting % value in equity return versus x times for others is difficult to grasp for most people. Use similar values.
Even though your advice was pretty decent, the calculations aspect and the logic makes the whole post very ambiguous.
@ Anand
A nitpick from my side.
Sensex/Nifty has returned a CAGR of only 7% in last 20 years. If this is not long term, Then i wonder how many years will be considered as long term ??
20 years back, UTI and SBI were considered as best MF because they were the first to start equity mutual funds + safe companies. Most of their two decades fund like SBI Magnum Equity, SBI Magnum Multiplier Plus 93 , SBI Magnum Global Fund, UTI Equity Fund, UTI Masterplus Unit Scheme and UTI Top 100 Fund have fetched a return of only 5%-8% CAGR . So even if someone started investing in Equity MF 20 years back and invested in these 3-4 funds through SIP, I don’t think anyone earned anything better than Bank FD. In fact, SIP returns are even less (Below 5%). Of course, later on in Mid and Late 90’s if someone diversified by investing in funds like Reliance Growth, HDFC Equity Fund, Franklin India Prima Plus, Birla Sun Life Advantage Fund, etc. then return could be 8%-9%. Nothing to cheer !!
Most people recommend Equity by calculating appreciation since Inception but they don’t realize that market was at base price. First bull market was due to economic reform. Now, our market is already matured enough. Now, It’s impossible for Sensex to rise 25 times in 15 years. Sensex EPS growth of 40% is impossible. Average growth in last 10 and 5 years were only 14% and 6% respectively. Sensex was at 100 in 1979. By the end of 1994, Sensex was around 4,000 means CAGR 34%. My point is one should not consider past performance (Since Inception) to recommend equity as initial rise was due to base-price which is not the case anymore.
In Last 10 years, Sensex return was close to 16% which is excellent but then even Real-Estate and Gold has given much better return in the same period. Gold prices are up by 65 times and real-estate price are up by at least 10-15 times in last 10 years (At least in Delhi-NCR Region). Not to forget, You don’t need too much research to invest in Gold/RE too. In MF, you need to keep changing your funds. 2007 star performer like JM Basic, SBI magnum tax gain, Reliance vision, Growth are no where near bechmark index forget about out performance.
In last 5 years, Sensex return is negligible. Debt, Gold, Real-Estate return has outperformed by miles.
Being an equity guy, I do agree that equity outperform in long run. However, Long term depends on market condition and not individual goal. There was a time for 10 years from 90’s till 2000’s when market was trading at same level. Who has the patience to invest in any asset class for 10 consecutive years, month by month with Zero (In fact negative) return? This is what happening currently. Last year, 20% Equity MF investors had redeemed their funds after 4 years or bad performance. When time was to Buy, Fund managers were selling.
One can earn good return provided that investors follow few things.
1> Invest through SIP (But Invest Lumpsum amount too when market is trading at lower levels. Like Aug-Dec 2012, July-Aug 2012, May-June 2011, Feb-mar 2011. Basically, when Sensex is down by 15%-20%. There is always such correction (Once/Twice in a year). When next time market is down, Just put more money. Those who buy in correction always make more money in long run.
2> Don’t diversify too much. A single MF is already too much diversified and IMO, that is the reason why majority of funds don’t outperform benchmark index. Choose better one and put enough money. Why to invest in 4th and 5th best when you can put in Top 3?
3> Have a proper Asset allocation. Market is mostly irrational. You may make huge money but when you need, market may not be in good mood 🙂 So, Invest what you can afford to wait with volatility. Once you think, Money is enough for Goal. Just withdraw. If you are investing for 15 years, Make it 20 years but if money earned is enough to complete your goal in 12 years, Withdraw at least half of it. Yes, Timing matters.
4> Learn about Equity market. Fund managers have too much restriction. It’s not too difficult as it seems. Once you have enough knowledge, Invest in quality stocks directly and be invested. You need just few hours in a month to do but few years to understand the market.
Thanks and Regards,
Vikash
Vikash,
Can you point me to the source of this statement:
Sensex/Nifty has returned a CAGR of only 7% in last 20 years.
I seem to be getting much higher numbers from other sources including mine
http://freefincal.wordpress.com/sensex-return-simulator/
I get 11.75% cagr for a sip started in 1992
Dear DareDevil13,
First a clarification: Mutual Funds are just a vehicle for investing in any asset class including debt, commodities, equity and real estate (real estate investment funds are widely available in developed countries, hopefully will be in India also in the coming years).
Now as to your main query i.e.
Equity vs Real Estate
Unfortunately, we do not have any real estate index in India that can provide historical data over the last 20-30 years. However, the general consensus from people in the industry who have tried to guage the returns is that real easte has provided 11-12%(before rent and costs) CAGR return over the last 3-4 decades. This is certainly a very good return and helps beat inflation.
However, equity has done much better at a CAGR of over 16%(before adding dividend yield and costs).
To understand the significance of the additional 4% please consider this:
Rs. 100,000 invested for 30 years at 12% CAGR becomes Rs.2,995,992 and at 16% CAGR it becomes Rs.8,584,988, which is almost 3 times.
However individual properties, just like individual company’s stocks may provide a very different return.
This is my first post in JagoInvestor so please do let me know if I have answered your query satisfactorily.
Dear Daredevil, whatever stated above is wrong. yes you read it right. Why? all of us are answering based upon the past data where as you are asking us to look into the future & do a crystal ball gazing for you.
None of us can do that. In fact nobody can predict the future. A slightly tweaked answer ‘ll be – Eq. has the highest potential to create sustainable wealth over such long time frames but more than Eq., it’s your own mind which ‘ll decide that you ‘ll be able to earn or not. It’s more of a mental thing & less a calculation thing.
Can you remain invested in Eq. from sensex level of 21000 all the way down to 8000 (repeat of 2008) & keep on investing? Only you can say for yourself. We can’t judge your risk appetite.
Thanks
Ashal
Ashal,
While I understand the spirit of your reply, I would appreciate if your answers don’t refer to my responses if you don’t have anything specific to disagree with. I have clearly referred to only the past. You may consider your answer tweaked but please do so without commenting on mine.
Dear Pattu, I’m sorry for my prev. reply where you feel offended. I’m happy for the fact that you were able to pick up the spirit of my reply.
So Here I stand corrected for my prev. reply that I had not put it to hurt you or to prove you wrong but was there merely to answer the basic query of dear Daredevil.
Hope, everything is fine now. 🙂 🙂
Thanks
Ashal
Yes.Thanks. 🙂
Is this true even for MF vs investment on land/flat (excluding occupied flat)?
Historically yes but real estate investments heavily depend on where the land is located. So their appreciation can be anything bet. 8% -15% annualized rate. It is difficult to come up universal numbers.
. Equity investment is the only easily trackable investment which has consistently beat inflation I would think real estate comes a close second but it depends on where the land is and many many factors which cannot be quantified.
However the key to beating inflation and controlling risk is to have a diversified portfolio where all investments (equity, debt, gold, real estate) play a role.
So to say equity outperforms inflation is true but a well chosen diversified portfolio is key to beating inflation.
Will add just one thing, real estate in our country behaves like single stock. If you are lucky, great.
A diversified real estate investment is not easy in our country. REITs are not easily available.
There is a ING real estate fund but that is an international feeder fund. A similar type of domestic fund will be great.