Equity investing - Adding sheen to your portfolio

The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.

News, these days, is rife with discussions about the state of the Indian economy and its growth prospect. Every other day, a domestic or an international research report is released, predicting the possible economic growth rate of India. Analysis of such reports invariably leads to one clear takeaway - it is the right time for retail investors to be a part of this growth story. If you find yourself wondering what does this mean and how can you accomplish it, help is here. 

The India growth story

Measures taken to stimulate growth and development across sectors have made India one of the fastest growing economies in the world. Favorable demographic factors, a strong wave of reforms and improving macroeconomic factors are likely to ensure that this stellar performance continues going forward. While global events may temporarily slow down this momentum, the long-term prospects continue to be bright.  In fact, as per an IMF report, India is likely to become the 3rd largest economy by 2030, just after the US and China. 

What it means for retail investors

As the economy grows, income levels and demand for various goods & services go up proportionately. This creates huge opportunities for businesses who can cater to these needs. If retail investors can identify and invest in businesses poised to benefit from economic expansion, they can grow their investments substantially. The equity market is the medium which allows a retail investor to invest in such businesses. When retail investors buy specific stocks, they become partners in the business they invest in, thereby sharing associated risks and profits. With the Indian economy estimated to enter the $5 trillion club over the next decade, a huge opportunity awaits for businesses and thus retail investors to grow their wealth through smart equity investments.

Proof that equity is the best investment option   

Given the predictions about the future growth trajectory of the economy, equity seems to be a viable investment option. But is there any actual proof of the performance of equity markets?  The answer is yes! 

The historical market data shows that when compared with other asset classes, equities have reported higher returns over a long-term. For a period from 1979 to 2018, when average inflation stood at 8.1%, FDs offered an average return of 9%, gold offered a return of around 10%, real estate investments offered ~13% while equities offered 16% returns in the same duration, thereby, beating inflation significantly. 

The quality of equity to give inflation-adjusted returns has made it an integral part of every financial plan. Be it planning for retirement, an international trip, children’s education or other long-term goals, a healthy dose of equity in the investment portfolio is regarded as a must. The value appreciation in investments provide by equity is unmatched and builds a strong case to include this asset-class in your financial plans.    

If market fluctuations seem to be a concerning factor, note that in spite of going through a number of recessionary phases time and again, global equities have given more than double the returns on an average per year. The domestic index, Sensex, has multiplied by more than ~360 times since its inception in 1979, giving a CAGR of ~16%, even after periodic market corrections. 

How to invest in equities  

Though equity investments make all the sense in the light of its merits, many investors still shy away from taking the plunge. Misleading information and lack of understanding tend to keep investors away from stock markets. However, investment in equity is not as complicated as it is made out to be. Below are a few simple steps you can take to harness the potential of this market:

• Research - Making investments in the equity markets is not rocket science. Once you have gained clarity on markets, it is easy to make your money work for you. Do basic research on how markets work and various concepts of equity investing. Rely on credible online resources and financial gurus to gain requisite insights. Do not make any decision on hearsay. Do proper homework- ask questions and seek answers to make an informed decision.    

• Observe and learn - Observe what is in demand and is moving fast. For instance, a weekend trip to a local mall can show you the wide range and variety of snacks on the shelf under the brand of few giants in the retail sector. While driving to the mall, you notice the traffic which is indicates growing two-wheeler and car sales. Once you have identified the products that are in demand and likely to be sought after, in the future, all you need to do is identify the companies that make them and invest in those companies.     

• Identify good stocks - Based on your research, identify companies that have business opportunities available in the sectors you identified. Ensure that they are managed by capable and visionary management. Check the track record of business to withstand challenges. This will serve as an indicator of their business and management capabilities which are crucial factors for success.

• Take a long-term horizon - Economic and business cycles are generally believed to last for five-seven years. It would be futile to get perturbed and create panic due to short-term market movements. In fact, regard these corrections as an opportunity to accumulate quality stocks. If you have invested after conducting thorough research, be rest assured that you will accumulate inflation-beating returns over the long-term.  

• Seek expert help, if need be - If you feel overwhelmed with the process, seek out professional help from a stockbroker. With their market understanding, they can guide you in achieving an efficient allocation of your limited resources to reap maximum benefits. Just like you go to a specialist and pay a consultation fee for curing specific ailments, visiting a brokerage house can cure your portfolio of stagnation and less than optimal returns to improve your financial health.