Why equity should be part of your portfolio

With all due respect to a well-known bike maker, the tagline “fill it, shut it, forget it” applies wholesomely to equity investing. On April 1, we marked 40 years of the Sensex, which launched in 1986 with its base value set at 100 points in 1979. On the same day in 2019, the index of 30 stocks representing India’s leading companies scaled a new peak of 39,000 points. It means that Rs 1 lakh invested on the index in 1979 would have grown 390 times to a whopping Rs 3.9 crore today. What does that tell us about equity investing?

HIGH LONG-TERM RETURNS

Equity investing has provided exceptional long-term returns. In 40 years, the Sensex has effectively delivered a compounded annual growth rate of 16.09 per cent. In the same period, gold has grown at a rate of approximate 9 per cent per annum from around Rs 100 to Rs 3000 per gram, implying that Rs 1 lakh would become Rs 30 lakh in 40 years. In 40 years, an eight per cent fixed deposit of Rs 1 lakh would give you Rs 21.72 lakh. Therefore, it’s abundantly clear: equity investing is one of the best ways to achieve fast capital growth and wealth creation.

THINKING LONG TERM

Investing is a long-term necessity. A well-thought out asset allocation and investment plan can help you accelerate wealth creation, achieve life goals, retire early, and secure yourself financially. As the returns data shows, equity investing is suited for the long-term. As an equity investor, you will be encouraged to think and plan long-term, and therefore be able to make better financial decisions than someone simply investing to save taxes.  

RISKS AVERAGE OUT

In the recent decades, barring a World War, several seismic events have come to pass, shocking the global economy and wiping out trillions of dollars of wealth. The Dot Com Bubble of 2000, the Great Recession of 2008, military tension among nuclear nations, terrorism, war, the rise and fall of governments, and so on. The stock markets rise and fall every minute. However, companies around the world are committed to creating value for customers and shareholders. Long-term equity investors have therefore been able to ride out these market shocks by remaining invested.

CENTRAL TO WEALTH CREATION

Look at the list of the world’s wealthiest persons. They are all wealthy because of their substantial equity holdings. You cannot become rich through savings and salary income alone. Your savings need to be invested wisely to accelerate wealth creation. The higher the risks, the greater the possibility of rewards.

DIVERSIFICATION IS NECESSARY

It is unwise to lock all your money in one asset class. Traditionally, Indians have favoured such options as gold, endowment plans and real estate. These options may not necessarily beat inflation in the long-term, which puts you at financial risks at an advanced stage in life. You don’t want to run out of money in retirement. By allocating part of your savings towards equity, you can aim for faster wealth creation while hedging your risks.

LOW BARRIERS TO ENTRY & EXIT

Equity investing has low barriers to entry. The brokerage charges and mutual fund management charges are little unlike other forms of investment constrained by agent commission, making charges for gold, and large capital requirements for real estate investment. If you are an equity mutual fund investor, you can start investing with as little as Rs 500. You can exit equity investments just as easily at any moment, barring tax-saving mutual funds that have a three-year lock-in.

LOW RATE OF TAXATION

The rate of taxation on equity investing is very low compared to other investments. Gains from equity investing are either Short Term Capital Gains (if invested for a period of under one year) or Long Term Capital Gains (if invested for more than one year). STCG is taxed at 15.6 per cent while LTCG over '1 lakh in a financial year is taxed at 10.4 per cent.

THERE’S ALWAYS A MUTUAL FUND

Direct exposure to equity is risky. It’s also a challenging task to determine which stocks to buy, hold, or sell and when. Few can profitably research equity to gain high returns, and even the professionals can get their calls wrong from time to time. Therefore, for beginners, it’s advisable to start investing with an equity mutual fund where you get a well-hedged and expertly managed portfolio of stocks. What’s more? In the long run, the best funds can outperform their benchmark indices such as the Sensex.

 — The writer is CEO, BankBazaar.com