Performance of Equity Vs Gold :

The surge of Gold Price to astronomical level in the recent past has made many investors assume that Gold is The Best form of Investment. The belief has become much stronger with the recent market crash from 21000 in Jan 2008 to 8000 by March 2009. With markets bouncing back to 17000 levels by October 2009, I often wonder which is the asset class that out performs over a long period. Hence, this Sunday when it was already 8PM IST, we did a small excercise ... and at the end we got some clarity. Hope this analysis is of some sense to you too.

This analyis includes following asset class:
(1) The NSE Index itself : comprising of first 50 stocks by size.
(2) BSE 200 : Comprising of first 200 stocks listed on BSE by size.
(3) BSE Small Cap Index : comprisiong of small companies ( less than 50 Cr by Share capital)
(4) HDFC Top 200 Fund : We picked this MF as sample fund since it is adequately diversified and it can be a suitable reflector of the Mutual Fund Ideology.
(5) Gold : This is the asset that is luring lots of investors recently. Many wonder if they should have invested in Gold, some 10 years back itself. There is a wide spread consensus that Gold is The Best investment option for investors.

Methodology:
We assume that we invested Rs.100 in each of these 5 assets six months back and we found its current value. We plotted the results in graph : showing the actual trend of each of the five assets. Similarly we did analsis for various time horizons.

We did analysis for investments made:
(1) 6 Months Before : (May 2009 to October 2009): This made sense, since stock markets made a monster run after the General Elections in May 2009.
(2) 1 year before : (Oct 2008 to Oct 2009) : October 2008 was the time when market actually started a second melt down. Octo 2008 was the time when Lehman Brothers went burst in USA. That triggered further fall in the already battered index.
(3) 2 years before: We can call this period from Oct 2007 to Oct 2009 as a full cycle. October 2007 was the time when BSE index started gaining 1000 points almost every week. Markets went crazy and were severly over valued.
(4) 3 years before:
(5) 5 years before: This can be considered as a medium term for investment.
(6) 10 years before: 10 years is One Decade. It could ideally be called as a long term.

Many assets which perform well in the short duration, may not do well in the long term. Ultimately, good return over long run is the one that makes your portfolio grow.

The Results:
6 Months: Many investors assume Gold performing very well in recent times. Being a recovery period, NSE delivered 38% return against 10% return by Gold. And the real surprising outperformance came from BSE Small Cap followed by HDFC Top 200 Fund
1 Year: Again all index outperformed Gold
2 Years: That is a beautiful chart. When global stocks melt down, money flew towards safer investments : Gold being one. Gold apperciated constantly and it delivered The Best Return. Watch gold appreciating indices were range bound after a steep fall. To put is simply "TINA" factor works here {TINA stands for There is No other Alternative}. Gold delivered 68% absolute return over 2 years against a paltry 3% by NSE Nifty. Interestingly HDFC Top 200 fund is the second best performer, delivering 28% return against its own benchmark BSE 200 which delivered 2.72%. Kindly note BSE Small cap delivering negative return of -14% resulting in capital erosion.
3 Years: Again Gold out performed followed by HDFC Top 200 Fund.
5 Years: HDFC Top 200 fund outperforms. BSE Small cap is the underperformer, running last in the race. Gold comes 3rd.
10 Years : That is Real Long Term. Had I invested 1,00,000 in 1999 in HDFC Top 200 fund, it would be Rs.10,36,300 plus today. That is a clear 10 Bagger in 10 years. BSE Small cap ( which we call as high risk - high return sector ) comes second. Similar fund invested in NSE Nifty would be worth Rs.3,59,000 : And in BSE 200, it would be Rs.3,78,000. The chart says, Gold has come last : 1,00,000 investment in 1999 would be Rs.2,59,000 today.

The conclusion:
(1) Over a long term, Equities outperform.
(2) More than that, over Long term, well diversified, well managed Mutual funds outperforms even better.
(3) Rather than taking high risk in Small cap, it makes lots of sense to stick to optimally diversified, preferably largecap and upper midcap oriented stock selection.
(4) Rather than breaking your head, which stocks to buy, what allocation to be followed, it is prudent to invest in good Mutual Funds : like
----(a) HDFC Top 200,
----(b) DSP Top 100,
----(c) Templeton Equity Income,
----(d) Reliance Regular Savings,
----(e) Kotak Opportunities,
----(f) Sundaram Smile,
----(g) IDFC Premier Equity,
----(h) Birla Midcap,
----(i) Deutsche Investment Opportunity,
----(j) ICICI Discovery Fund
(4) No doubt, Gold gives stability to portfolio by fluctuation less and appreciating gradually. But, one can have small allocation of portfolio ( 10% to 15%) to Gold. Donot count on recent outperformance of Gold to continue.
(5) If we are right, Gold appreciates proportional to Inflation. If Inflation falls, Gold would stop appreciation.