In a study conducted by PMSBazaar, PMS investment approaches outshines gold and equity market returns in the long-term (10 years).

Long-term investment strategies are championed by financial experts for a reason. This is particularly true for equity investments globally. In India, the Nifty 50 index, the benchmark index for the equity market, saw an impressive Compound Annual Growth Rate (CAGR) of 13% over the past decade (between FY14 and FY24). This data underlines the potential for significant wealth creation through equity investments over a long period.

India’s economic performance during this period has been equally impressive and has helped the equity market performance. The country’s GDP grew steadily from about 6.4% in FY14 to an estimated 7.6% in FY24. Additionally, India’s projected economic growth trajectory, supported by various international agencies and global brokerages, paints a promising picture for future equity returns. For instance, a global brokerage house, Jefferies India projects India’s GDP to reach a staggering $5 trillion by 2027. This would propel India to the position of the world’s third-largest economy, signifying its growing importance on the global stage.

Despite the compelling prospects of the equity market, a significant portion of Indian investors hold a deep-rooted affinity for gold. Traditionally, gold has been viewed as a safe haven asset, offering stability and security during periods of economic turmoil. This perception makes gold a comforting investment for many Indians. It is worth noting that India is the world’s second-largest consumer of gold jewellery, with total holdings in jewellery and bars/ coins reaching a substantial 747 tonnes in 2023 as per the World Gold Council. While rising gold prices could have caused volatility in gold consumption, gold demand is anticipated to grow (in India) in the coming years. This enduring popularity highlights the unique cultural and emotional significance that gold holds for Indian investors, even if it may not guarantee the highest financial returns compared to other asset classes.

While the Indian equity market has delivered strong returns, gold’s performance hasn’t been as impressive. Over the past decade, gold’s CAGR sits at around 9%, which falls short of the Nifty 50 index returns. However, there is a crucial difference in their behaviour: gold and equity returns tend to be negatively correlated. In simpler terms, when the stock market stumbles, gold often shines.

For example, during the market crash of March 2020 triggered by COVID-19 lockdowns, the Nifty 50 plunged 23% (1 month), whereas gold managed a 3% gain. It is important to note that even gold’s performance was muted due to the extreme uncertainty of the situation.

This highlights the value of portfolio diversification. A well-diversified portfolio containing both equities and gold would have been better equipped to weather the volatility caused by events like the pandemic.

While we have discussed the performance of equities and gold, Portfolio Management Services (PMS) offers another investment avenue with superior returns. PMS invests in listed stocks and debt instruments.

PMS cater specifically to High Net-Worth Individuals (HNIs) and Ultra-HNIs. These bespoke investment solutions require a minimum investment of Rs. 50 lakhs and tailor portfolios for some investors with large investments.

That said, comparing PMS and gold directly wouldn’t be entirely fair. They target different financial needs and risk tolerances. However, understanding their distinct approaches provides valuable information for investors seeking high-performing options.

To delve deeper into long-term PMS performance, a study by PMS Bazaar analysed 365 PMS investment approaches within our universe. Of these, 58 approaches have a 10-year track record, allowing us to understand their long-term asset allocation and performance. Note that, for our study, MCX Spot Gold Prices (Rs per gram), and for Nifty  50 Index and for PMS, data as on March 31, 2024, are considered.

Gold and Equity Market: How was the performance? 

The Indian equity market, despite volatility on account of multiple factors including COVID-19 and the liquidity crisis before that, has delivered impressive results. The Nifty 50 Index has nearly tripled in value in the past 10 years. This has helped in the performance of PMS Investments as well.

Also, the global economies’ stability over the years has kept gold prices steady. But with the recent geopolitical tensions, gold prices have rallied.

While gold has its advantages, equity markets have historically delivered superior returns over extended periods. This makes them a compelling option for long-term investors seeking to grow their wealth.

However, gold isn’t without its merits. It tends to outperform equities during times of economic turmoil. For instance, gold had outperformed Nifty 50 during FY08 to FY09, which was affected by the (2008) global financial crisis. In FY09, gold’s performance was about 25% while Nifty 50’s performance was down 36%. A similar outperformance was visible in FY20 (one-year performance) due to COVID-19-induced lockdowns and restrictions. The performance was repeated in FY23 (one-year performance), which saw the Russian-Ukraine war. Gold was up 16% and equity was down about 1%.

Gold has outperformed Nifty 50 in 3 of 10 years between 2014 and 2024. 

Having said that, we can’t undermine the importance of gold as an asset class. For centuries, gold has been an integral part of India’s trade and economic activities. The critical insight lies not in the isolated performance of each asset class, but rather in the importance of diversification, especially when navigating periods of economic uncertainty. While equities have demonstrably provided superior long-term returns compared to gold, gold possesses a unique ability to act as a hedge against volatile stock markets during economic downturns.

A simple example:

For instance, assume that you had invested Rs 10,000 (lump sum) in April 2019 in gold as well as the Nifty 50 index. You exited in March 2020 when Covid struck. The combined portfolio value would have stood at Rs 20,398. But the standalone returns during the same period for equity and gold were -26% and 30% respectively. This scenario exemplifies the power of diversification in safeguarding capital during market volatility.

How did PMS Fare? 

As an investment option, PMS is ideal for wealthy investors – HNIs and UHNIs. That is, it is best suited for those who are looking to build a portfolio for superior returns over and above their existing investment portfolio. Many wealthy Indians are taking to PMS as an asset class for investment for their attractive returns and the portfolio managers’ flexibility and ability to invest in stocks from a large universe including in micro-cap stocks.

In the past 10 years, the average return of 58 PMS investment approaches (that have completed 10 years) stood at 18%, outperforming benchmark indices. Nifty 50 and Nifty 50 TRI (total return index) were 13% and 14% respectively. Further, about 72% of the PMS investment approaches have outperformed their respective benchmark.

What’s interesting to note is that the least-performing PMS investment approach gave a return of 10.57% in 10 years, outperforming gold from the debt category. In equity, the lowest return was 12.48% during the same period.

PMS investment approaches have outperformed the overall market and gold not only in the long term but also in the medium and short-term time frame.

Do keep in mind that before contemplating which investment avenue fits your needs, remember that, understanding investment objectives, risk tolerance, and minimum investment comfort is crucial. Also, note that past performance is not always indicative of future results. Diversification and long-term investment across asset classes including PMS and gold are key to any successful wealth creation strategy.

Top PMS Investment Approaches over the years

Similar trends were seen in the 5-year and 3-year time frame as well. In the medium term (5 years), of the 169 PMS approaches within the PMS Bazaar universe that have completed five years, 105 (about 62%) have outperformed their respective benchmark indices with an average return of 18.58%.

In the 3-year time frame, the average return of PMS approaches stood at 20.53% while that of gold was 14.63% (CAGR) and the Nifty 50 was 14.97% (CAGR). Of the 249 PMS approaches within the PMS Bazaar universe (those that have completed 3 years), 144 have outperformed their respective benchmark (outperformance 58%).

Takeaway 

Based on the above study, three main pointers stand out.

One, equity investing has historically been the best path to building wealth over time, especially considering the strong performance of the Nifty 50 index. Two, while gold holds cultural significance for many Indian investors, its returns haven’t matched equity. And three Portfolio Management Services (PMS), catering to wealthy individuals, have also outperformed the market and gold.

So, the key to wealth creation success lies in understanding your risk tolerance and diversifying across asset classes. However, comparing PMS directly to gold isn’t ideal since they target different needs and risk profiles. Regardless, understanding their approaches is valuable for investors seeking high-performing options. Equity markets offer superior long-term returns, but gold can shine during economic downturns. This makes each asset class valuable for different reasons in a well-diversified portfolio.