investment: Go slow on gold ornaments, gift your daughter a portfolio of bluechips
When our daughter got married in 2008, we gave her only a modest quantity of gold ornaments. That was so modest by Kerala’s societal standards that it raised many eyebrows and comments such as ‘they should have given much more’. But, the critics focused on the glittering yellow metal were unaware of the fact that we gave our daughter a portfolio of bluechip stocks. This portfolio of stocks like HDFC Bank, HDFC, ICICI Bank, Infosys, Reliance Industries, Larsen & Tubro and others gave her excellent returns. One stock – Bajaj Financial Services – turned out to be a multibagger multiplying 40 times in 13 years. Her portfolio has done far better than, what the economist Keynes called, the ‘arrogant yellow metal.’
Weddings, particularly of daughters, are expensive affairs in India. Customs and traditions last long. Gold is an integral part of weddings in our society. As an investment, gold has done reasonably well. Gold ETFs and Sovereign Gold Bonds (SGBs) provide better options for investment. But stocks have outperformed gold by a wide margin. The BSE Sensex (100 in 1979) has appreciated to around 60,000 now, giving a CAGR of around 16 percent. This is almost 8 percent more than the 7.35 percent CPI inflation during this period. Also, the Sensex returns have clearly beaten the 8 percent risk-free return from government bonds during this period.
In spite of this stellar performance, Indian households have been reluctant to invest in stocks. The allocation of household assets in India as on December 2020 are: 48 percent in property; 17 percent in gold; 16 percent in bank deposits; 11 percent in insurance, PF, pension funds etc; 4 percent in equity and 4 percent in cash.
Out of the total population of 136 crores, only around 4 percent have exposure to equity, which is the best performing asset class. Why is this so? The simple answer is that the majority of retail investors have not benefited from the stock market boom. The villain is the wrong investment strategy of retail investors. More often than not, retail investors enter the market at its peak when the valuations are high and exit in fear when the market crashes.
Worse, they invest in cheap low-grade stocks, which will be smashed in a bear market. Also, rather than investing they trade in the market. Empirical evidence tells us that the majority of traders/ speculators lose money. The way out of this trap is to invest in high quality stocks for the long-term or to invest through mutual fund SIPs.
About ten years ago, I addressed a gathering of women school teachers in Kerala on financial planning. I advised them to start SIPs in equity mutual funds at least on an experimental basis for a few years. Their response was ‘stocks are very risky.’ News headlines such as “stock markets crash; investors lose their hard-earned money” had influenced them. Financial history and data didn’t convince them. But they were keen to know about gold and the prospects of gold.
This attitude should change. Financial history tells us that stocks outperform all other asset classes in the long run. As the economy grows and corporate earnings increase, investors will be handsomely rewarded. So, for your daughter’s wedding, don’t cover her with gold ornaments as many parents do. Instead, give her a gift of ‘bluechip stocks’ and let her benefit from the India Growth Story.
(The author, Dr. VK Vijayakumar, is the Chief Investment Strategist at . The views are his own.)