Column

If the stock markets get indecisive after the budget, there are two ways to look at the unfolding event: as an opportunity or a threat.

Actually, it’s both. The short-term outlook for the market isn’t great, as interest rates are going to rise, and the finance minister has begun pulling the stimulus rug from under the economy’s feet without letting any sector fall too badly. All of which will spook investors for a while.

But if you are a serious investor, that’s not the way to look at the markets. You have to look at the broader fundamentals and not the narrower problems that bedevil the economy this year. And when I say serious investor, I don’t mean you need to be seriously loaded; rather you must have an ability to take longer-term risks.

Unlike some of the text books, which link risk-taking ability to age and personal resources, I believe everybody has the capacity for taking risk. Even the poor invest in lottery tickets, forgoing today’s meal in the hope of a better return someday. Mostly they lose it all; but they do have the ability to take risks that are disproportionate to their means.

The fundamentals we are talking about are simple: India is the world’s biggest growth economy, driven largely by internal consumption. Pranab Mukherjee’s latest budget gives consumption a push by putting more money in your hands.

Meanwhile, as the government keeps spending huge sums of money on the aam aadmi, more and more people will join the consuming classes, bringing millions into the formal money-based economy. In the years to come, this fact alone will have enormous consequences for growth, as consumption widens and deepens the domestic market. China may be growing faster than us for now, but we will overtake it sometime in the next five years.

If this fact alone is not good for the markets, here’s another. Indians are grossly underinvested in stocks and shares, not to speak of mutual funds. The vast bulk of the money invested in stocks and mutual funds is institutional, and households have very little at stake.

According to one estimate, only Rs 5 in every Rs 100 of household savings gets invested in mutual funds. If this amount is raised to even 25% of savings, we are staring at a huge rise in stock market valuations. And we are not even talking about pension fund investments, and money that will come in from foreign institutions.

It is worth recalling a basic truth about stock market investments.

The money you make depends on the quantity of investment that flows into stocks, and not the fundamentals of a company’s performance. If you look at stocks from this perspective, the sheer amount of money waiting to get into stocks is large enough to ensure that people who invest now will make high returns. The earlier you get in, the more the money you will make as the stock markets are a naturally occurring Ponzi scheme that deliver great returns to the early birds.

To be sure, the same logic may apply to investments in real estate and gold, too. But I doubt it. Real estate in India is a rigged market, and is not driven purely by demand and supply. Politicians, builders and criminal elements manipulate the prices, and the chances are that they will know how to make money from it rather than you or me. Realty makes sense only to the extent you want to live in your own house.

You could get lucky and multiply your money, but don’t count on it. Moreover, a house is not easy to buy or sell. You may see a price that looks good enough to you, but finding a buyer for that price is always tough. You may spend weeks chasing a buyer and still not consummate the deal.

Gold is better. It’s easy to buy and sell through exchange-traded funds. Thanks to the likely fall of the dollar over the next few years, there is widespread expectation that the dollar prices of gold and commodities will rise. But the US is the world’s most dynamic economy. Despite its present troubles, it may yet pull off an economic turnaround that the world wasn’t expecting. So I would not place more than a tiny bet on gold.

In the next 5-10 years, Indian stocks will outperform every other asset class barring esoteric ones like painting or sculptures. I plan to put every available rupee in it. I started last year, and will continue to do so this year too.