Why Retail Investors should invest in Equities

Why retail investors must seriously look at equities now…

If you broadly consider the asset mix of Indian households, it is a telling story. We have roughly $1.3 trillion in bank deposits and FDs. We have another $1 trillion that is locked up in gold; in a variety of forms. But, equity as an asset class constitutes just about $350 billion of household wealth. Unlike gold and FDs, which are well spread out, equities among retail investors is fairly low.

Recent reports are already celebrating the fact that equity mutual funds have seen their 16th consecutive month of positive collections. But what we are ignoring is that for almost 5 years prior to that we have seen outflows from equity funds and retail folios being closed down. But the time may actually be ripe for Indian retail investors to seriously look at equities as an asset class. Here are 3 reasons, why!

Gold will be a dollar play…

For ages Indians accumulated gold in the belief that it was one asset class that will never lose value. A strong dollar has turned that logic on its head. With the dollar likely to continue its hegemony, gold is unlikely to strengthen any time soon. The philosophy that central banks will shift out of reserve currencies into gold is again not entirely valid today. Under these circumstances, it makes a lot more sense for retail investors to reduce their holdings in gold and increase their holdings in equities. Surely a better investment bet!

Bank FD rates cannot sustain…

India has put itself in a tight corner. To attract foreign flows into debt, the RBI has kept its interest rates on the higher side. This has made bank deposits seductively attractive for investors. Probably, no country pays the kind of rates that Indian banks pay on deposits and that is clearly not sustainable. As rates fall and the FDs become less attractive, the question is what now. The answer may lie in equities. It may make a lot more economic sense for Indian households to reduce their bank deposits and increase their stake in equities.

Why equities now?

There are quite a few strong justifications for a shift to equities. Firstly, as rates go down the biggest beneficiary could be equities. Secondly, the sharp 18% correction in Indian equities has brought the market closer to average valuations than any time in the recent past. Thirdly, within the universe of equities, there are pockets of value that are emerging. These are stocks that have corrected more than warranted by fundamentals.

The key message here is re-allocation. For too long, Indian have been overexposed to bank deposits and gold and underexposed to equities. The time to decisively correct that imbalance may have finally arrived. It is time to act! ©

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