In this article we take a look at 6 best investment options in India in 2018. These options are chosen from 3 different asset classes and they provide best returns for the chosen asset class.
Ideally, investors should have their capital allocated over multiple asset-classes in proportions determined by their risk appetite and investment time horizon.
Successful investing in our view comprise of 2 steps:
- Knowing historical returns of various asset classes
- Figuring out how we can improve over the historical averages.
In this article we take you through these steps.
Historical returns of various asset classes in India
Fig-1, represents wealth accumulated by a hypothetical investor residing in India who put one Rupee each on FD, Gold and Stocks in 1981. As on 2017, nominal value of that one rupee investment before adjusting for inflation would be as follows:
FD post-tax 12.89 (Pre Tax Rs 29.06), Gold Rs 25.6 and Stocks Rs 221.72
Fig-1, Comparison of wealth (nominal) accumulated by investing one rupee in 1981, on various asset classes over a period of 37 years in India
CAGR returns (nominal)
- FD Pre Tax 9.81%
- FD Post Tax 7.36%
- Gold 9.43%
- Sensex 16.19%
How can be improve on the above base returns for each asset class?
Best investment options in Stocks
Between 1981 and 2017, BSE Sensex stocks gave a nominal return of 16.2% CAGR (before adjusting for inflation).
Easiest way to replicate the Sensex or NIFTY returns is by investing in an Index Fund. There are multiple AMC offering Index Funds or ETFs based on Sensex or NIFTY where you can invest to replicate the broad market returns. But how can we improve on this?
The easiest and the most cost effective way to do that is by investing in a Strategy Index.
For example, NSE offers various types of indexes as shown below:
In particular, the following 2 index strategies can be particularly relevant:
Equally Weighted Index (NIFTY100 Equal Weight).
Most indices around the world, including NIFTY and Sensex are price-weighted. This means buying more of stocks that go up, and less of those that goes down. As you can understand, this may not be the best investment strategy. EWI on other hand allocates equal amount of capital to each of the constituent stocks.
Over long term, EWI have historically outperformed price weighted indices, and hence this offers a better alternative over vanilla NIFTY or Sensex based index.
You can learn more about EWI and similar strategies here.
Value Index (NIFTY 50 Value 20)
This index consists of 20 ‘Nifty 50’ companies which are selected on the basis of Return on Capital Employed (ROCE), Price-Earnings (PE), Price to Book Value (PB) and Dividend yield (DY). This is like index investing with a value twist.
Value investing in contemporary term means buying stocks with lower PE, PB or high dividend yields. Historically these strategies have outperformed market returns over long term and you can read more about it here.
Particularly over the past 1 year, value 20 funds have significantly outperformed market returns.
While we do not expect these strategies to beat market returns every year, but over long term they have proven to generate better returns that the market.
Best investment options in Gold
Between 1981 and 2017 gold gave a return of 9.43% CAGR (in the form of price appreciation). However, if you had invested in physical gold or ETF then the returns would have been lesser, as long term capital gains are taxed at 20% (with indexation benefits). So, what is the best way to invest in Gold?
In our opinion, the best investment option in Gold is using either of the following:
- Sovereign Gold Bonds (SGB)
- Gold Monetization Scheme/ Revamped Gold Deposit Scheme (R-GDS)
In both these options, gains from price appreciation are exempt from LTCG.
Further, investors making long term deposits in these schemes are eligible to receive interest at 2.5% per year. In R-GDS these interests are also tax free, while in SGB interests are taxed at marginal rate of income tax.
Assuming long term return of 9.4% CAGR in Gold, investing through R-GDS further adds 2.5% on top, making overall return of 11.9% CAGR.
This is a very respectable return, particularly considering that it is entirely tax free.
You can read more about various investment options in gold here.
Best investment options in Fixed Income instruments
Fixed deposits gave a return of 9.81% before tax between 1981 and 2017. However, interests on Fixed Deposits are subject to taxation at marginal rate of income tax. Assuming an effective tax rate of 25%, this return comes down to 7.36%.
Note that returns on fixed deposits are expected to come down from historical figures as rate of inflation declines.
Coming to the best option to invest in Fixed Income instruments, in our opinion it would be PPF.
Apart from relatively higher interest rates offered by PPF compared to other savings schemes or bank deposits, both capital investments and interests on PPF are exempt from tax, which is an unmatched feature in fixed income instruments.
PPF offers host of other benefits as well and you can read all about it here.
The drawback though is that you can invest only up to 1.5L per year which may not be adequate for most HNI investors.
For them, the next best alternative is NSC where there is no yearly restrictions. You can continue to claim tax benefits under 80C although the interest is taxable.
For most investors, investable capital should be allocated over different asset-classes in proportions decided by individual’s risk appetite and investment time horizon.
For individual investors therefore it is important to know the relative risk-reward potentials of different asset classes and ways to improve them.
In this article we presented historical returns offered by 3 asset classes – stocks, gold and FDs over past 31 years in India.
For each of these 3 asset classes we offered 2 techniques (total 6) using which you can improve the base rate of returns significantly
Hope you benefit from these investment options going forward.