AS an investment advisor, you would think I spent most of my time equipping people with brilliant investment strategies.In reality, a huge chunk of my time goes in clarifying the basics, especially where equity is concerned. The eternal question people ask is, should I invest in equity? Let me answer that by getting some facts right.
Fact 1: Over the long term horizon, equity investments have given returns which far exceed those from debt-based instruments. They are probably the only investment option that can build large wealth.
Fact 2: In the short term, equities exhibit very sharp volatilities which many of us find difficult to stomach.
Fact 3: Equities carry lot of risk even to the extent of wiping out our entire corpus.
Fact 4: Investment in direct equity requires us to be in constant touch with the market and do a lot of research.
Fact 5: Buying good scrips requires fairly large investments.Doesn't sound too good, does it? But if you can overcome these problems, go for equity. You could also consider systematic investing in a mutual fund. It helps prevent the pitfalls of equity investment while you can enjoy high returns. This is all the more important today when the stock markets are booming.
1. Leave it to the expertWhen you invest in a mutual fund, you get the advantage of your fund being managed by professionals or experts. They carry out extensive research on the company, industry and the economy, thus ensuring informed investment. They also track the market regularly. Thus, for many of us who do not have the desired expertise and are too busy with our careers to devote sufficient time and effort to invest in equity, mutual funds offer an attractive alternative.
2. Spread the eggsEven with small amounts, you can enjoy the benefits of diversification. For an individual to achieve the desired diversification, it would take huge amounts which would not be possible for many of us. Diversification reduces the overall impact on the returns from a portfolio on account of a loss in a particular company or sector.
3. Choose transparency and regulationThe mutual fund industry is well regulated by the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). They have, over the years, introduced regulations which ensure smooth and transparent functioning of the mutual funds industry. This makes it safer and convenient for investors to invest through mutual funds.
4. Make market timing irrelevantOne of the biggest difficulties in equity investing is 'when' to invest, apart from the other big question, 'where' to invest. While investing in a mutual fund solves the issue of 'where' to invest, Systematic Investment Planning helps us overcome the problem of 'when'. SIP is disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. Today, when the markets are high, it may not be prudent to commit large sums at one go. With the next two to three years looking good for the Indian economy, you can expect handsome returns through regular investing.
5. Don’t strain the budgetMutual Funds let you invest very small amounts, say, Rs 500 to Rs 1,000 in SIP, as against the larger one-time investment if you were to buy directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small-time investor who might otherwise not be able to enjoy the benefits of investing in the equity market.
6. Reduces average costSIP makes you invest a fixed amount regularly. So you buy more units when the markets are down and the Net Asset Value is low and vice-versa. This is called rupee-cost averaging. Generally, you would stay away from buying when the markets are down. You tend to invest when the markets are rising. SIP works as a good discipline -- it forces you to buy even when the markets are low which, actually, is the best time to buy.
7. Helps fulfill your dreamsThe investments we make are ultimately for some objectives, such as buying a house, children's education, marriage. Many of them require a huge one-time investment. It is quite tough to raise large amounts at a short notice, and you need to build the corpus over a longer period of time through small, but regular, investments.These small investments, over a period of time, result in large wealth and it helps fulfill your dream be it a house or a yacht. So get ready to pop the champagne. But, remember, drink one SIP at time!
- Sanjay Matai