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Equity markets still a good bet

A N Shanbhag

Success in the share market is extremely subjective as the concept differs from person to person.

For example, during the tech boom, investors, in all probability, would have been disappointed had their investment returned anything less than, say, 50 per cent per cent. However, currently, such an yield is beyond anyone's imagination.

That said, my definition of a successful stock investment is one which earns substantially more than less risky fixed income instruments. These would be debt-based units of mutual funds or the Unit Trust of India, yielding the market interest rate with adequate safety. At the moment, this rate is 10 per cent. The greater the differential, the greater my success as a stock investor.

Post liberalisation, the market was expected to witness a linear rise barring short-term swings. But strangely, over the last few years, the Sensex, a barometer of market performance, had been slipping into what appeared to be a bottomless pit.

The bulls proved that money could be minted by taking stocks beyond their fundamentals.

The bears realised that the same was true by taking the prices to the other end of the pendulum. Thanks to the lack of insight into who was responsible for the situation, coupled with the virtually non-existent judiciary, both the bear and bull cartels succeeded in making hay. And the retail investors were at the receiving end in both the phases.

It is a well-recognised fact that a few thousands rupees invested by millions have a much greater impact on the health of the market than millions of rupees invested by a few thousands people.

Given the fact that at this point in time, most scrips are undervalued, eventually the market will be driven by its gravitational level and rise. But the process would be much slower than desirable.

Successful stock market gurus like Warren Buffet and Peter Lynch have repeatedly pointed out that buying on bad news and selling on good is the only way to make money. Buy low and sell high is less of a mantra and more of common sense. And today, prices are low.

So should the retail investor enter at this point? Well, for starters, let us have a clear insight into what the returns from the market have been over time.

The real returns

Historically, over a period of time, investment in stocks have earned far superior returns for investors than other investments.

Secondly, it is always the long-term view that pays rich returns. Researchers have proved that this is a worldwide phenomenon. India is no exception.

Coming to actual returns, normally, stocks are expected to yield returns through capital appreciation, bonus and rights issues and not by way of direct dividends. However, dividends, low or high cannot be ignored altogether. By very conservative estimates, yield by way of dividend (on prevailing market prices and not the original face value) happen to be around 2 per cent.

Unfortunately, all and sundry, do not factor in this dividend in their benchmarks, but only go by the Sensex. Therefore, any analysis carried out on the basis of only the Sensex is deficient to that extent.

This appears extremely attractive, especially in the wake of the returns on other avenues. Even so, let me make it more attractive.

As mentioned earlier, the above analysis is faulty as it totally ignores the dividend income. Add the average dividend of around two per cent per year to the above figures to obtain the real market returns. (This is not a simple addition, the dividend has to be compounded).

Tax on market returns

Returns from the stock market are extremely tax efficient. The dividend has the shield of Sec. 80L up to Rs 9,000. And if the recommendations of the Kelkar Committee are accepted, this dividend will be totally tax-free both in the hands of the shareholder as well as the company.

The tax on long-term capital gains is at the rate of 10 per cent without indexation and at the rate of 20 per cent with indexation, whichever is lower.

Even this can be saved by resorting to the shelter of Sec. 54F or 54EC or 54ED.

What to buy?

All this looks good. But, it still leaves the crucial question unanswered -what share to buy? If you are indecisive and do not particularly trust your broker, don't worry, you are not alone.

Simply buy an index fund. Then consider the above table and patiently wait for the market to do what it does. The return will take care of itself.

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