Why many Indian investors shun

equities
Indian investors follow a very conservative investing approach and hence it is seen that equities
(including equity mutual funds) comprise only around four percent of their portfolios. Financial expert
Jayant Pai analyses on why Indian investors feel uncomfortable in allocating more wealth in equities.

You may remember the time when, as children, you were forced by your parents to eat your vegetables.
When you quizzed them for a reason, they simply said "Well, you MUST eat them because they are good for
you". Today, stockmarket 'experts' have taken the place of parents, by screaming to all within earshot that
everyone's investment portfolio MUST contain equities. They lament that Indian investors do not know what is
good for them. That is why, equities (including equity mutual funds) comprise only around four percent of
their portfolios.
Why is it that Indian investors shun stocks in favour of other assets ? Here are a few reasons :

Delayed feedback mechanism: All investors would like clarity on two things - (A) The returns that they can
expect (B) The downside that they are likely to suffer. In case of investments other than equities, either the
expected returns are known in advance or the volatility of returns is locked in a tight range.
Unfortunately, stocks do not offer comfort on both these aspects. Neither is the return fixed nor is there a floor
to the downside (Investors may not find quips such as "The price cannot go below zero", very funny). In other
words, in the case of stocks, the feedback mechanism is delayed far into the future. Hence, they are less
attractive.
It ain't the numbers alone: While I believe that one can choose any sample set to prove one's point, it is a fact
that there are several studies that show that stocks have outperformed many other asset classes over long
periods of time.
However, this alone is not enough. While a rational investor may be convinced by such statistics, real-world
investors are more emotional than rational. To most, investing is much more than mere numbers. Softer
aspects such as 'comfort' and 'familiarity' play a big role. Gold and fixed income options instill a 'warm and
fuzzy' feeling inside most Indian investors. That is why they choose them. They do not mind losing out on a
few percentage points of return in the bargain.
The 'touchy-feely' aspect: For many investors, the term 'investment' should connote something 'solid'. A gold
bar or an apartment provides that solidity. We could extend this to the figurative solidity provided by a fixed
deposit with any Government owned bank. Unfortunately, to many, stocks are mere pieces of paper. In other
words, you exchange one piece of paper (that is, money) for another. Now with demat accounts, even this
piece has been replaced by a book entry. Also, it is likely that one may suffer monetary losses even if one
purchases the stocks of 'blue-chip' companies. Hence, solid companies need not necessarily be 'safe-and-solid
investments', unless one has impeccable timing.
The trust factor: Stockmarket 'experts' often counter the above apprehension by saying that stocks must be held
for the long-term. But time frames of short, medium and long are too nebulous for most investors. Besides,
there is a feeling that often, advice from such 'experts' lacks accountability. Also, they notice that most of the
talking heads advocating investment in stocks are associated with the stockmarket in some form or the other,
be it as brokers, money managers, investment bankers etc. Hence, even though their advice may be
well-intentioned, investors tend to look upon it with a degree of suspicion.
Lack of peer pressure: Investors are often driven by the 'Herd Mentality'. If your friends and acquaintances
have been making money in gold and real estate and 'preserving' their capital in fixed deposits and bonds, you
would prefer to follow them rather than be the outlier in the group. The implicit pressure exerted by your peer
group, has a big impact on your investment psyche. It certainly is far more influential than some stranger
extolling the virtues of stocks.
Predictably incorrect: Just as economists have failed to predict most of the recessions, for the past decade (at
least since 2004), gold and real estate bears have predicted crashes that did not happen. On the other hand,
investors have witnessed at least three big falls in the stock market (2006, 2008 and 2011), the impressive
point-to-point increase notwithstanding. Hence, investors are pretty sanguine that there is going to be no crash
in gold or real estate. Of course, only time will tell whether they are right or not.
Indifferent to cash flow: Sure, most purists do not treat gold bars and locked-up apartments as 'investments' as
they do not generate any cash-flow. However, many investors are indifferent to this. They purchase it merely
for steady capital appreciation, and are, therefore, not willing to stomach the price volatility inherent in
equities, even though they may receive dividend income.
Also, on many occasions, gold and real estate serve as better collateral than equities while borrowing, as the
haircut on them is lower. This is due to the fact that bankers, too, are wary of equities.
It does not happen only in India: It is only in the USA and (probably) England that equities form a substantial
chunk of investors' net worth. In most parts of Europe and Asia, equities only play a peripheral role in most
retail investors' portfolios. Hence, Indian investors seem to be the rule rather than the exception.
All this does not mean that Indian investors will shun equities forever. The current nibbling may increase to a
bite-sized chunk in due course. However, this may happen due to more mundane asset allocation
considerations, rather than any 'compulsion' to choose equities.




Time is ripe for conservative investors to bet on monthly income plans (MIPs) of mutual funds, say
investment experts. MIPs, which have been touted as an ideal vehicle for investors looking to take a
small exposure in equities, invest 5% to 25% of their corpus in equities and the balance amount in bonds
and other fixed income instruments.





Though these schemes aim to distribute monthly dividends (hence the name monthly income plans),
there is no guarantee on the frequency of dividends.
Religare MIP Plus and Taurus MIP Advantage, launched in the last two years, invest a part of their corpus
in gold, too. MIPs offer growth and dividend options. Investors with regular income needs should opt for
the dividend option. Dividend declared by these schemes attract a dividend distribution tax of 13.52%. If
you opt for the growth option, long-term capital gain tax liability would be lower of 20.6% with
indexation or 10.3% without indexation.

"Interest rates have peaked and are expected to come down. Pressure on corporate margins too is
expected to ease. As both equities and fixed income are likely to do well, MIPs are a suitable option for
conservative investors now," says Ajit Menon, executive vice president - head sales, DSP Blackrock
Investment Managers.

While falling interest rates offer capital gains on bonds along with interest, expected increase in stock
prices should boost the returns on the equity part of the portfolio. "Interest rates are expected to go
down by 100 bps in the next one year," says Mahendra Kumar Jajoo, executive director and chief
investment officer (fixed income), Pramerica Mutual Fund. "With renewed global investor interest in
Indian equities after the recent reform measures, it is a good investment option," adds Jajoo.

The recent performance of these funds has been very promising. The debt-oriented conservative MIP
category has gained 3.65% in three months ended October 25, according to Value Research, a mutual
fund tracking entity.


IDFC Monthly Income Plan leads the pack with 5.62% returns in three months, followed by HSBC MIP
Savings with 5.43% returns. These returns are mainly from the equity components of these schemes.
S&P CNX Nifty, the market benchmark, has gained 11.66% in three months.

If you are thinking of investing in MIPs, you should look at the fund manager's strategy and asset
allocation of the scheme before investing. As you would know a lower allocation to equity means you
don't have to face much volatility. As for the debt part of the portfolio, a higher average maturity of the
fixed income portfolio would be more sensitive to interest rate changes.

"If you can digest some volatility due to changes in interest rates, you can look at funds with high
average maturity - more than five years - of fixed income portfolios," says Rupesh Bhansali, head -
mutual funds, GEPL Capital. He recommends IDFC MIP and Reliance MIP in this space.

A point to note is if the interest rates fall, high average maturity portfolios are expected to bring higher
returns in the form of capital appreciation. But if rates go up in short-term, such portfolios can show
some capital loss too, bringing down the overall portfolio returns.




"If you are really not keen to expose yourself to interest rate risks, better stick with funds with relatively
low average maturity of fixed income portfolios. Additionally, the fund manager should ideally restrict
equity allocation of the fund to large-cap stocks," says Rupesh Bhansali.

This conservative strategy may not deliver top of the chart performance for investors but surely
minimises volatility in portfolio returns. He prefers HDFC MIP-Short Term plan and Birla Sun Life MIP-II
Savings 5 option in this space.

Market pundits are of the opinion that if you are bullish on gold in the medium term, you can consider
schemes that invest a part of the portfolio in gold. But those bullish on equities should invest in
traditional MIP schemes that invest in varying combination of fixed income and equities. "MIPs should
deliver healthy risk-adjusted returns, comfortably beating fixed deposits in two to three years," says
Rupesh Bhansali.