Equity as Asset Class

 

 

Equity as an asset class has able to achieve returns in excess of inflation for a larger period of time.  Equity assets, also known as “stocks”, represent ownership in a business.   Equity share can be bought or sold through the recognized stock exchange. Once bought, it gives investor partnership / ownership rights. Shares can be bought directly or indirectly through investment vehicles such as unit trusts, life products and derivatives. Equity as an asset class provide dividend yield apart from capital appreciation. An equity share is a right to the profits of a company.

 

Why equity

 

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

equiy 

An analysis of different assets shows that equities across the world have given the best returns for a longer period of time. Few arguments are –

 

  • For long-term investors (seven years plus), It has potential for higher returns with higher risk. The real case for equities is that, over the long term, stockholders have enjoyed a large equity risk premium.
  • Secondly, there is a potential for income through the payment of dividends. In most of the countries dividend is exempt from taxation.
  • One can diversify the equity portfolio in sector, occupation, country etc. . It significantly reduces this risk.
  • Investing in global equities, rather than just domestically, reduces portfolio volatility & enhances Return. Like for example, recently, emerging market (China, India, Russia etc.) return is on the higher side due to growth potential

 

 

 Historical return of various asset classes

 

Risk & Return in US Market
Assets Average Return Standard Deviations
Equity 6.90% 17.70%
Bond 2.30% 10.40%
Bills 1% 4.70%
Gold 2.40% 12.40%
Housing 1.50% 8.90%
All returns are in US & in $ terms. In case of Housing, rental income not added
Source: Elroy Dimson, Paul Marsh, and Mike Staunton

 

 

 

How to Invest

 

One can approach the equity market directly or via through mutual funds. Apart from that there is various other option like Portfolio Investment service (PMS) , Money manager etc.

 

 

How to Invest in Equity
Through Direct Equity Mutual Fund
Primary Participation Initial Public Offer (IPO) New Fund Offering (NFO)
Secondary participation Stock Exchange Open ended Fund
Asset Class Stocks Unit or Fund
Dividend Tax Free Tax Free
Costs Commission + Govt tax Load + Govt tax
Risk Company  Specific Risk Sector / theme specific

 

 

Conclusion

 

One has to understand that stocks do well when corporate earnings are strong. Stocks have significantly outperformed other asset class in a long period even though it commands risk premium.

 

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