Equity – an asset class you can’t ignore!

Published On: 01-Sep-2017

Blurb: Equities have a history of creating wealth for the ones who have stayed invested in the asset for the long-term; still most of us term it as a high risk asset class. Know why you can’t give a miss to this asset class and not investing in equity could be more risky.

It’s been 5 years since Raj married his childhood love Maya. A gradual increase in expenses has been a concern for Maya, even after her conscious efforts of not falling prey to unnecessary expenses. But Raj doesn't give a heed to Maya’s worry and almost every Sunday morning there is a light tension in the air when they discuss about the weekly expenses. 

But this Sunday was different & it changed their lives completely. They were invited to a friend’s birthday party where they bumped into their old school friend Anil. After exchanging pleasantries, they started discussing about their personal and professional life. Anil was intelligent who also managed to do well when it came to managing his money and had built huge corpus in just over a decade. Anil always was vigilant about these spending and saving habits. 

Maya knew this and spoke about her worry where they could merely save anything, while Raj seemed to be least interested. After a long discussion, Anil supported Maya and spoke about the impact of inflation or a general increase in prices and the fall in the purchasing value of money.

Maya was quick to point out the prices of few day to day products which have been rising consistently. Anil smiled. During this, to boost about his investment skills, Raj entered the conversation by pointing out that he had taken an endowment insurance policy and have a few fixed deposits with his bank as his investment. After listening patiently, Anil highlighted the impact of falling interest rates on Raj’s investment. Anil added, “Suppose, your investment earns ` 6 after tax on ` 100 invested but your expenses increases in that year to the tune of ` 6 then effectively, your money is not working hard for you. Thus you need to invest in a product that could help you earn higher rate of return than the rate inflation rate”

Maya had heard a bit on equities and soon asked about investing in equity markets to Anil. Raj felt it was too risky and there were too many stories of people losing money. Anil smiled and said, “Investing in equity market isn’t gambling. When you invest in equities you invest in a business. And when you talk about risk, it is also there when you are doing a job for a company which might not do well and you might lose your job. Thus to negate risk you could apply for a job in big companies offering stability whereas for better growth prospect you could think of joining a startup. This is similar to equity investing; you select a company based in your risk appetite and your view for the company. 

What’s’ more, when you invest in equities you are not an employee, you get the ownership in a business. And like your job, it is important to stick to your investment decisions and only review how it’s going for you and the company periodically and not daily, isn’t it? Similarly, there is no need to buy and sell every day or worry about where the overall market is going. Raj interrupted, “if we don’t watch the market then how will we know whether we are making profits or losses?”

Anil replied, “Not needed. Check this example - If ` 1000 was invested in Sensex during 1979 when it was first formed then as of today in 2017 they would have made Rs. 2,49,252 even after a lot of volatility that came along.  The one who ignored the daily noise of new channels would have managed to stay invested longer and benefit the most. And the icing on the cake is the fact that the gains would have been tax-free as long-term capital gain tax on equities held for more than 1 year is nil.”

Maya excitedly asked, “Then how to start investing in equities?”

“Through Mutual funds” Anil promptly answered. “It’s the job of the professional fund managers to protect investor’s money and help them earn better returns. They meet evaluate various businesses, meet their managements and decides on how much to invest in a particular business based on the overall strategy and framework. Finally most important of all, they diversify investment across various companies lowering the overall volatility.’ Raj was impressed, while Maya was just about to ask which mutual fund to buy, someone shouted, “Its cake cutting time!” upon which they decided to meet the following week and take the discussion ahead.

As they were heading towards the cake, Maya’s got a message on her phone which quoted Warren Buffett, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” She looked at Raj and said, “Let’s plant trees for our old age and children.”