Pathetic Bond Real returns in India

June 27, 2024 3 min read

Many investors compare their returns in US dollar terms with other markets. But it is more meaningful to consider returns in local currency terms and adjust for inflation. This way, we see gains in real terms, not just nominal terms. Comparing with other countries is good practice, but the true impact on our investments comes from local currency performance and inflation adjustment.

A study by Bloomberg Finance looked at the performance of various asset classes over the last 50 years in local currencies. India topped the charts with nearly 17% nominal gains per year. Adjusted for inflation, the real returns were 8.9%, which is outstanding. Beating inflation by 8.9% annually means significant real growth. If inflation is 4-5%, you’re still making solid returns.

Source : Bloomberg

Comparing Global Markets

Even advanced markets like the UK, France, Germany, and the US are beating inflation by a good margin. This shows that the best asset class for real returns remains equities. In the last 50 years, equities have consistently outperformed other asset classes in providing real returns.

Commodities vs. Equities

When we look at commodities like gold, oil, and copper, the returns are much lower compared to equities. Gold has provided a real return of 1.7% in US dollars. Oil and copper have barely matched inflation, making their real returns almost flat. Bonds have also performed well globally, with real returns of 2-3%. However, in India, bonds have only given a real return of 0.8% over the last 50 years.

Importance of Equity Allocation

From this data, it’s clear that equities should form a significant part of your investment portfolio. Bonds and commodities may provide some returns, but equities offer the highest real returns over time. The data also includes house prices, showing that real estate provides modest real returns compared to equities. In the UK, real estate shows a 2% real return, and in the US, it shows 1.5%.

Start Investing in Equities Today

Given this information, it’s crucial to review your investment allocations. If you haven’t started investing in equities, the best time to start was yesterday. The next best time is today. If you have a horizon of five years or more, there is no reason not to have equity exposure. Young investors should have a significant portion of their portfolio in equities, while older investors may have less but still need some equity exposure.

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    Pathetic Bond Real returns in India