Equities Anyone?

At a time when serious questions are being raised about the performance of equities as an asset class globally (see here and here), Economic Times provides a primer on why investors should bother with this asset class in the Indian context.

Though its risky and volatile in the short-run, all kinds of long-term gains from equity, including capital returns and dividend income, are tax-free . In fact, as the investing period gets longer, dividend becomes a significant part of gains from the equity investment and it provides investors with a consistent flow of tax-free income.

...Equity outdoes other asset classes not only because of the lower tax incidence, but also due to much higher pre-tax returns. To ascertain the extent of the out-performance, let us say, an individual had invested Rs 100 each in the Sensex, bank deposit, commodity index and gold on January 1, 1991. The sum of Rs 100 invested in equities must have swelled to Rs 965.4 on December 31, 2008. During the same time period, the investment in bank deposit, commodity index and gold would have swelled to Rs 499, Rs 158.7 and Rs 225.7, respectively. This shows that equity has outperformed other asset classes by leaps and bounds. Not only that, at the peak of equity market, the value of Rs. 100 would have swelled to Rs 2,031.6.

...The combination of high pre-tax returns and lower-tax incidence make equity perhaps the best asset class to invest in. However, there is a caveat here as the equity investments are subject to much higher fluctuations, hence, only on a longterm basis that an investor should expect high returns.

(Emphasis mine)