Equity Investments: Smartest Way To Create Wealth – Axis Direct
Feb 19, 2019 | Source: economictimes.indiatimes.com
Why Are Equity Investments The Smartest Wat To Create Wealth?
Eat. Sleep. Earn. Repeat. That’s the cycle most individuals follow when it comes to working for a corporate or running a business. We’ve got bills to pay, and dreams to achieve. We’ve also got to prepare for retirement. So, we save for them – using savings accounts, fixed deposits, recurring deposits, post office schemes, and more. What we fail to see is how inflation eats away at our savings.
The key is to NOT save, but generate real wealth – and that comes with smart investments.
Equity, hands down, is the best asset class to help you create wealth. It beats inflation, and compounds at higher rates than your other products. In the last 30 years, the average return from equities (Sensex) has been ~14 per cent and inflation has been ~7 per cent.
Investments in equity come with risk, as it is a volatile asset class, but data shows if you stay invested for longer periods in equity, the probability that you make any negative returns diminishes. If you invest for a year (not recommended for equity), chances you’d make losses are 28 per cent. But if you expand your horizon to say 5 years, the probability reduces to just 5 per cent, 10 years reduces your chances of a loss to 1 per cent, and 15 years reduces it to 0 per cent!
The best way to enter equities is through systematic investment plans (SIPs) in equity mutual funds. Mutual funds not only spare you the hassle of picking stocks and managing your portfolio by yourself, they give you a host of other benefits that include liquidity, flexibility, and diversification.
Using SIPs, you put your investments on auto-pilot, invest regularly, and can benefit from rupee cost averaging which allows you to buy more units for the same amount when markets are falling, and vice versa. Take advantage of market volatility with SIPs.
Picture this – you want to have Rs 10 lakh for your child’s education 10 years down the line. If you invest a lumpsum of Rs 4,00,000 today, assuming annual returns of 12 per cent, at the end of 10 years, you’ll have ~Rs 12,50,000. But if you were to put the same Rs 4,00,000 in an FD, you’d have made only ~Rs 8,00,000 at 7 per cent interest. These numbers are pre-tax.
Here’s a mutual fund for every goal. For goals 3-5 years away, you could consider balanced, aggressive equity hybrid, or large cap funds. For goals further away, you can consider mid, small cap funds. You could choose to add thematic funds to your portfolio for the long-term goals but ensure that the allocation to this doesn’t exceed 5% of your portfolio.