Asset class returns: equity is the winner

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Winners among asset classes keep rotating but equity (including large-, mid-, and small-cap) has been the best performer in most years, as per the financial year-wise performance data collected for the last 10 years for various asset classes (see table, check online for full table). Here’s a quick look at what the data say about each asset class.

Higher returns : The best year for domestic equities in these years was FY21. The low-base effect of FY20, in which markets witnessed a sharp correction due to the outbreak of covid-19 aided returns in FY21, in addition to stronger economic recovery and global quantitative easing. A closer look at the returns reveals that the small-cap segment outperformed all the other asset classes in five out of 10 FYs. However, it also fell sharply compared to others during the years when markets corrected.

Further, the mid-cap index wasn’t the best or the worst performing asset in any of the last 10 financial years. But Mint’s analysis shows that the mid-cap index outperformed in the 10-year period based on the rolling returns for the period between March 2015 and March 2022. “Many mid-cap stocks transition to large caps over a longer period and after that, there will be a big difference in valuations,” said Dr. VK Vijayakumar, chief investment strategist at Geojit Financial Services.

Intl diversification: The direction (rise or fall) of yearly returns of both domestic and international equities (S&P 500 index, in this case) was the same in most years. “When we say international markets provide diversification, it may not be purely in terms of market movement only,” said Prableen Bajpai, founder, FinFix Research and Analytics. Over a longer period, Indian markets and global markets have a positive correlation but not a very high positive correlation. “Also, in times of crisis, there will be huge pressure on the rupee. International investments may not benefit in terms of dollar returns, but helps in rupee terms,” she pointed.

 

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Bumpy ride for gold: Data show that gold underperformed more times compared to other asset classes. The best years for gold were the worst for equity. Ghazal Jain, fund manager, Alternative Investments at Quantum AMC, said gold has an inverse relationship with risk assets and currencies and often negatively correlates with a strong global economy.

“Gold is sometimes more volatile than other assets including equity, but it usually is a short-term phenomenon,” said Dr. Joseph Thomas, head of research, Emkay Wealth Management. “Exposure to gold helps in events like crisis and one must hold about 5-10% of their portfolio in gold,” Thomas added.

Gilt funds: The average one-year return of the Crisil 10-year Gilt Index (7.1%) in the last 10 financial years was only slightly better than the Crisil 91 Day T-Bill Index (6.8%). Joydeep Sen, an independent debt market analyst said, “A look at the long-term returns from gilt funds and liquid funds reveals that the former performed much better than the latter.”

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