Annual inflation in India has averaged 5.9% over the past four years starting with the pandemic-year 2020-21 and would be 5.5% over a five-year period till the end of 2024-25 if this year’s reading comes in at 4.5%, as the Reserve Bank of India expects. As a saver, one would like to get a real return that is positive.
The drift lately has been towards capital markets, where returns have tended to be quite attractive. The remarkable exuberance seen since covid has percolated to the market for initial public offerings (IPOs), where the high market prices of newly listed shares have provided their allottees substantial gains in recent times.
The accompanying table shows the returns on various instruments during the first six months of 2024-25. It is assumed that money was invested at the end of March and values in September 2024 have been used to gauge returns, with averages for these months taken for this purpose.
Alongside, it shows comparable returns over the last 10 years ending 2023-24 to provide an idea of historical trends, since the returns scenario of six months cannot be assumed to hold in the future.
The first thing that will strike the reader is that the stock market is probably quite consistent in giving a return of 15% plus, going by the National Stock Exchange’s Nifty, a popular index.
This is so not just over the first half of this year, but also over a span of 10 years. This is in line with what is usually said about equity markets: that one needs to stay invested for a long period of time to reap returns. Just how long should that period be?
In three of the past 10 years, the broad return from Indian equities was negative. At its peak, the index registered a gain of over 70% in 2020-21. This was not unprecedented, as its increase was also above 70% in 2009-10, though this rise was even more in the nature of a recovery, given the sharp drop after the 2008-09 crisis in the US triggered by the collapse of Lehman Brothers.
Returns vary from year to year. To gauge this risk, the standard deviation of annual returns can be assessed, as this tells us the general variation from the mean return. It was 26% for the decade.
Even if we stretch this analysis back by another 10 years, the standard deviation works out to around 28%. Therefore, an investor risks annual returns varying by more than a quarter up or down.
The precious metals duo of gold and silver has done very well this year, with impressive returns. This was largely due to the West Asian imbroglio as well as expected actions to be taken by the US Federal Reserve and the possible outcome of next month’s US election.
The global dynamics of safety-seeking money mean that the price of gold tends to move inversely with the dollar. The same holds for silver. Demand has been especially high this year as central banks and exchange traded funds have bought the precious metal, pushing up its price. But over a longer period of time, the return from gold is in a modest range of 2.1% to 4.6%.
Currencies are evidently not a good investment proposition, as they offer very low returns even over a long period of time. This can be explained by the fact that excess volatility always calls for some intervention, which ensures that the rupee’s exchange rate moves in a certain band, even though this is not intentional.
Therefore currency trading works for dealers who work on minor rate movements, but does not really suit long-term investors who may want to bet on a depreciation to make money.
Crude oil can be traded in the futures market, but does not sound like a good investment for the long-term as its price varies in response to factors that are subject to much uncertainty.
There have been wild swings in both directions based on the geopolitical situation. Hence, taking a long- horizon view is difficult. Besides, with the world becoming cognizant of climate change and moving to cleaner sources of energy, overall demand for crude oil may be expected to slow down over time.
The market for fixed-income instruments is another area of interest. Here, bank deposits have given a return of around 7%, which covers inflation and yields a real return of about 1.5%. Similarly stable returns can be received from government paper and treasury bills.
Here, the variation could range from half a percentage point to 1% every year, with a standard deviation of only 0.63%. If one opts for a basket of government paper that the NSE Composite G-Sec index is based on, then this year’s return was around 5.8%.
Usually, with savings held in a deposit or government security, the yield is known over the debt’s tenure and coupon payments are guaranteed.
The table includes two products that can serve as theoretical investments, as they involve commodities that can only be traded in physical markets.
The two pulses included, chana and tur, are products for which demand-supply mismatches ensure that returns are usually impressive. Note that these commodities are associated with high inflation in the country.
In the final analysis, it would seem individual investors face a classic choice between fixed-income instruments and equities (via mutual fund possibly). The long-term performance of equities has been impressive. But how long is ‘long’?
A ten-year frame of analysis appears to make a convincing case in favour of equities, but that would not ensure a steady flow of income. For that, fixed- income options would work better, even though their returns are not very exciting.
These are the author’s personal views.
