In times of crisis, rely on equities

Since the Lehman bankruptcy, defensives like FMCG and pharma stocks have performed distinctly better than gold.

In recent years, gold prices have shot up significantly. Investors have found solace in the yellow metal, especially since equity markets have been disappointing.

However, over a longer period of time, defensive equity funds, including exchange-traded funds that mimic gold prices, have given more returns than gold funds.

If one considers data since the Lehman crisis of September 2008, which had investors scurrying for cover, pharma and fast-moving consumer goods (FMCG) funds have actually outperformed gold funds.

For instance, the average annualised return given by FMCG equity schemes during the period was close to 40 per cent. In the case of pharma schemes, the returns are slightly lower at 36 per cent, whereas gold funds have returned 31 per cent (see table).

This means an investment of Rs 100 three years earlier would have become Rs 270 in FMCG schemes, Rs 251 in pharma schemes and Rs 226 if invested in gold funds. More, looking at the top 10 scheme categories, nine are in equity. ICICI Prudential FMCG and Magnum FMCG are among the FMCG schemes. On the pharma front, the schemes include Magnum Pharma, Reliance Pharma and UTI Pharma & Healthcare.

In other words, while many investors have been losing faith in equities due to continued volatility and a downward bias, these have continued to perform over longer periods of time. The lack of faith in equities has been observed due to the consistent decline in fresh inflows toward equity schemes. On the other hand, inflows are rising in gold funds, including exchange traded funds.

Dhirendra Kumar, chief executive officer of mutual fund tracker Value Research, says, “One cannot stay away from equities for long, as (equity) markets cannot go wrong in the long term. In the worst of times, defensives like FMCG and pharma are better than gold in terms of portfolios’ performance.”

The numbers of these schemes, over a longer period, have also been impressive. Even over a five-year period, these two categories of MF schemes have been top performers ,with returns of 15.76 per cent for FMCG schemes and 12.56 per cent for pharma schemes. Banking funds returned 11.46 per cent. There were no gold funds five years earlier.

Obviously, industry experts are bullish on equities. Arindam Ghosh, chief executive officer, Mirae Asset Management, says, “This is yet another instance which brings a lot of learning for investors. Investors should opt for equities with a minimum investment period of at least three years and get adequately rewarded.”

Independent analysts do not see gold as a high-return asset class over a longer period of time. According to Dhurva Chatterji, senior research analyst at MorningStar India, “Though gold has been the best performing asset class in the past few years, investors should not see it as a high-return asset class but as a stable investment option. Expectations of double-digit return should not be based on the recent trend.”

As Mirae’s Ghosh puts it, “Gold is not a productive asset class. It is, more or less, perceived as a refuge in an environment full of risks.