Four Myths About Investing In India

Every investor begins their financial journey with a set of beliefs about money. These beliefs are often inherited from family members, reinforced by friends, or shaped by popular opinion rather than objective evidence. Over time, they become accepted as facts, even when reality tells a very different story. In this chapter, Saurabh Mukherjea examines four of the most deeply rooted investment myths in India and explains why blindly following them can prevent investors from building meaningful long-term wealth. The author argues that one of the biggest challenges facing Indian investors is not a lack of investment opportunities but a reliance on outdated assumptions. Many people continue allocating their savings to assets simply because previous generations believed they were safe or profitable. Unfortunately, an investment strategy that worked decades ago may no longer produce the same results in today's rapidly evolving economy. Successful investing therefore requires questioning conventional wisdom rather than accepting it without evidence. The first myth explored in the chapter is the belief that gold is the best protector of wealth. For generations, gold has occupied a special place in Indian households. It represents security, tradition, and financial comfort. Families purchase gold during festivals, weddings, and important life events, believing it to be a dependable store of value that will safeguard wealth during uncertain times. While acknowledging gold's cultural significance, the author examines its actual investment performance. Historical data reveals that although gold has delivered respectable returns over long periods, Indian equities have consistently generated superior wealth creation. Over multiple decades, the Sensex has produced higher annualized returns than gold while rewarding patient investors with stronger long-term compounding. This suggests that emotional attachment to gold should not be mistaken for financial superiority. The chapter also challenges another common argument in favor of gold—that it acts as an effective diversifier because its price supposedly moves opposite to the stock market. Although this relationship has occasionally existed over short periods, long-term evidence shows that gold's correlation with equities has been inconsistent. In several decades, both asset classes have moved in similar directions, reducing gold's effectiveness as a reliable hedge. As a result, building a portfolio heavily dependent on gold may not provide the protection many investors expect. The second widely accepted belief concerns real estate as the ultimate wealth-building asset. Across India, owning property is often considered the defining symbol of financial success. Parents encourage children to buy homes early, investors purchase multiple properties hoping for appreciation, and rising property prices are frequently interpreted as guaranteed future profits. However, the author encourages readers to separate emotional satisfaction from investment performance. Residential property prices in many major Indian cities have delivered relatively modest returns over recent years, in several cases barely keeping pace with inflation. At the same time, buyers face significant borrowing costs, maintenance expenses, registration charges, stamp duties, brokerage fees, and taxes. These additional costs substantially reduce actual investment returns. Liquidity represents another major weakness of real estate. Unlike publicly traded shares, a property cannot be sold immediately whenever cash is required. Finding buyers often takes months, negotiations can be lengthy, and transaction costs remain substantial. During financial emergencies, this lack of flexibility becomes a significant disadvantage. Equities, by contrast, provide much greater liquidity while requiring significantly lower transaction costs. The author further points out that rental yields in India remain relatively low compared to borrowing costs. In many cities, rental income generated from residential properties fails to adequately compensate investors for the cost of financing those assets. This imbalance suggests that property prices may not always reflect strong underlying investment value, even if public sentiment remains optimistic. The third myth addressed in the chapter relates to debt mutual funds being low-risk investments capable of generating attractive returns. Because these funds invest primarily in fixed-income securities, many investors assume they are almost entirely safe. Financial advisors frequently promote debt funds as stable alternatives to equities, leading investors to underestimate the risks involved. The author explains that debt funds face several important sources of risk. The first is interest rate risk. When interest rates change, the market value of existing bonds also changes. A rise in interest rates generally reduces bond prices, causing debt fund values to decline even though the underlying investments remain fixed-income securities. Credit risk presents an even greater concern. Fund managers seeking higher returns often invest in lower-rated corporate bonds that offer attractive yields. However, these higher yields exist because the borrowers themselves carry greater default risk. If financially weak companies fail to repay their obligations or experience credit downgrades, the value of those bonds declines sharply, directly affecting investors in the fund. Liquidity risk forms the third major challenge. India's corporate bond market is relatively illiquid compared to government securities. During periods of financial stress, fund managers may struggle to sell lower-quality bonds at reasonable prices. This creates additional pressure on fund performance precisely when investors seek safety. One particularly insightful observation made by the author concerns incentives within the mutual fund industry. Fund managers often experience pressure to deliver higher short-term returns than competing funds. To achieve this, some managers increase portfolio yields by purchasing lower-rated debt instruments. These strategies may appear successful for several years, attracting additional investor money. However, when defaults eventually occur, investors frequently suffer significant losses that far outweigh the earlier gains. The final myth examined in this chapter is perhaps the most influential: the belief that GDP growth automatically drives stock market returns. Many investors assume that rapidly growing economies must inevitably produce equally strong stock market performance. Consequently, they spend considerable effort attempting to predict economic cycles in the hope of timing market movements. The author presents evidence showing that the relationship between GDP growth and stock market returns is far weaker than commonly believed. Economic expansion certainly creates opportunities for businesses, but stock market performance depends on many additional factors, including corporate profitability, competitive positioning, market expectations, valuations, capital allocation, and investor sentiment. In fact, research from global markets consistently demonstrates that countries experiencing rapid GDP growth do not always generate superior stock market returns. Likewise, slower-growing economies can still produce outstanding investment performance if businesses continue creating shareholder value efficiently. Another important reason for this disconnect lies in the composition of stock market indices. Large listed companies do not necessarily represent every sector of the broader economy. Economic growth may occur in industries that contribute relatively little to major stock indices, while listed companies may face competitive pressures despite overall economic expansion. Therefore, using GDP forecasts as the primary basis for investment decisions often leads investors toward inaccurate conclusions. Rather than focusing on macroeconomic predictions, the author encourages investors to concentrate on individual businesses. Exceptional companies are capable of delivering strong earnings growth even during periods of slower economic expansion because they possess competitive advantages that allow them to outperform their industries. Likewise, weak companies can struggle despite favorable economic conditions. The broader lesson emerging from all four myths is remarkably consistent. Successful investing requires evidence rather than assumptions. Gold, real estate, debt funds, and GDP forecasts all possess roles within financial discussions, but none should be accepted as automatic indicators of superior investment performance. Every asset class carries strengths, weaknesses, risks, and limitations that must be understood objectively. The chapter concludes by encouraging investors to shift their attention toward equities—not because they are risk-free, but because ownership of exceptional businesses has historically offered the greatest opportunity for long-term wealth creation. However, investing in equities requires a disciplined framework rather than speculation. Simply buying stocks is not enough. Investors must also learn how to identify companies capable of delivering sustainable growth while minimizing unnecessary risks. By challenging these long-held assumptions at the very beginning of the book, the author prepares readers to approach investing with a more analytical mindset. Instead of relying on popular beliefs or inherited financial habits, investors are encouraged to evaluate every opportunity using data, logic, and long-term business fundamentals. This willingness to question conventional wisdom becomes the foundation upon which the rest of the Consistent Compounding philosophy is built.