The Indian retail investor is getting poorer. This is not good news. But the evidence is irrefutable. It is in the latest Reserve Bank of India report.
It says that only about 1.4 per cent of retail assets are in equities or related instruments. The remaining 98.6 per cent of assets are predominantly in fixed income instruments, life insurance, real estate, gold etc. Fixed income/life insurance yield nominal returns of 5-6 per cent per annum with returns from bank deposits being taxable.
Returns in case of gold, silver and real estate would not be significantly better, if we ignore the recent run-up and look at a longer period of one or two decades. The only asset class that has yielded 18-20 per cent per annum is equities.
Our economy has been growing in real terms at 7-8 per cent per annum and in nominal terms at 12-14 per cent per annum Agriculture with land as a limiting factor can't deliver more than 2-3 per cent per annum growth and therefore industrial and services sector, represented mostly on the bourses, can deliver nominal earnings growth of 20-25 per cent per annum I, therefore, would like to argue that our retail investor is getting poorer as his/ her wealth is decaying in relative terms.
In the last two years, the stock markets have had a dream run and the Sensex has crossed the magic number of 10,000. During this time period, the retail investor has been selling and FIIs have been buying. Now everybody can see that FIIs and funds have made a huge killing on their investments in India.
Sadly, the retail investor hasn't fared that well. Who has led or misled the retail investor into consistently selling stocks, despite his low holding and bright prospects for the economy? Why is it that the retail investor shuns the capital market? Why is it that a typical retail investor in India is not comfortable with investing in stock markets despite it having one of the best regulatory environments as well as high quality corporate governance?
While none can predict the future, on balance the Sensex at 10,000 is also not scary. Our markets are at a P/E of 19x and 15-16x with respect to FY06 and FY07 earnings. These P/E multiples are not high, keeping in mind the growth prospects and the much lower interest rate of 6-7 per cent per annum as against say 15-16 per cent a decade ago.
While equity investing carries higher risk, it cannot be ignored for the simple reason of higher returns over the longer term. Retail investors would do well by keeping part of their assets in the form of equities always, rather than trying to time the market.
The author is chairman & managing director of India Infoline Ltd.