Portfolio

Don’t stay away from equities

B. VENKATESH | Updated on March 23, 2013 Published on March 23, 2013

Equity provides higher return than fixed deposits

We are increasingly observing the reluctance of not-so-old working professionals to invest in equity. Such individuals prefer real estate to equity — one of the two preferred investment assets in the country; the other being gold.

In this article, we discuss why you should also invest in equity and also the steps you could adopt to kick-start your equity investment.

You should necessarily have investments in equity and bonds whether you are a working professional or a retired individual. This is because equity can generate high returns and bonds can provide stability to your investments.

True, your real estate investments would have generated handsome returns in the last 10 years. But don’t let past performance prompt you to make real estate your first choice of investment. Why? Well, you cannot sell real estate at short notice and at the last traded price.

But why bother about liquidity? Suppose you are accumulating wealth to fund your child’s college education 10 years hence. You will then need to convert your investment into cash in the 10{+t}{+h} year. You will agree that selling equity investment is easier than selling real estate.

Besides, your equity investment is not lumpy. This helps you to adopt a disciplined approach to savings by instructing a mutual fund company to debit your bank account every month to invest in a chosen equity fund.

Your investment in real estate requires large down payment not to mention arranging for a bank loan. And what will you do with your potential monthly savings till you accumulate the required money for down payment? If you are not a disciplined individual, you will be tempted to consume the part of your monthly income that could have otherwise been invested in mutual funds. But why also invest in equity and not fully in bonds?

Higher return

The reason is simple. Equity provides higher return than fixed deposits. You may argue that fixed deposits with banks are ‘safer’. That is not true in the context of your investment objective. This is because you may be confusing ‘safe’ investment with ‘certain’ cash flows. No doubt, your cash flows from FDs are more certain than your returns on equity. But that does not make them safe!

Safe investments are those that will increase your chances of reaching your investment objective. Suppose you need 12 per cent annualised return for 10 years to meet your child’s education cost. Investing only in bank deposits fetching, say, 9 per cent annual interest is a sure way to fail in achieving your objective! A combination of fixed deposits and equity, on the other hand, increases your chances of meeting your objectives.

You may be apprehensive of investing in equity for two reasons. One, you perceive equity investments to be riskier than real estate. And two, you truly believe that investing in equity requires knowledge of the markets. We suggest the following measures to help you moderate your fears.

While equity is risky, the perception of higher risk primarily stems from the visibility of prices.

You can easily observe fluctuating equity prices while the same cannot be said of real estate. The best way to allay this fear is to review your equity investment once every six months. As for the second reason, it is true that knowledge of the market is useful when it comes to buying individual stocks. You should, therefore, start with a systematic investment plan in a Nifty Index fund.

Start with at least 25 per cent of your monthly savings in such a fund. If it gives you any comfort, choose a mutual fund company whose brand-name you recognise. And remember this if nothing else: you should necessarily have equity and bonds in your portfolio. Real estate is a choice.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to >knowledge@thehindu.co.in)

Published on March 23, 2013
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