The Third Most Important Decision every investor should take
Can you guess the third and final decision that you need to take? Think for a minute. The first was Time (Creates Money by Compounding) and the second one was Saving (Your input for the compounding ). Did you now manage to get the third one? The third and final decision is the vehicle that gets your input (saving) to compound over time. I am sure you would have guessed it by now.. The Answer is “What percentage of your savings do you allocate to Equity?” We will denote it by Equity (Ownership- By this I mean you become an Owner in a company).
Most Indians think of equities, or stocks or shares as risky investments. This is precisely why you saw very little participation in the equity market till a couple of years back . This is changing now and we are seeing investors investing Rs.7500 Crore per month through Equity Mutual Funds alone. Well managed Equity Mutual Funds are the best way for investors to participate in the Equity market.
Equity, as an asset class, should be a key component of every portfolio as this asset class has the potential to provide the highest post-tax returns in an emerging economy such as India. The proportion of equity in your portfolio can vary based on your overall objectives, returns needed for goals, time horizon, investments in other assets and ability to sleep well when Equity markets go up and down. Needless to say this is every investors best chance of letting compounding work for them in the best possible manner. Yes there will be down times in the market but for the long term investor these are great times to invest more. Either way it is very important for an equity investor to value these 3 things.
1. Strong Belief in the India Growth Story
All the 3 above are easier said than done but they will reward you extremely well if you stick to these principles.
Let’s see how equity has delivered over the past 38 years in India from 1979 till 2017 when the market was at 30000 (Even after the correction the market is at 36000 odd today but I have just taken a number of 30000 to highlight the power of equity). Equity over a period of 38 years has delivered around 16.19% per annum . Has this return come in a linear fashion? No, certainly not. In fact, equity markets operate in bullish, bearish and consolidation modes. There are times where markets go up for an extended period of time, there are times when markets go down for a extended period of time by as high as 60% (individual stocks can even go down 95% or more), and there are times when markets are flat at particular levels or in a narrow range(consolidation mode).
Can you imagine the kind of compounding a 16% return would do over 38 years. Rs. 1000 at a 16% return compounded annually in 38 years would be 2.81 Lakh. Similarly Rs. 10000 will be Rs. 28.1 Lakh and Rs. 1 Lakh will be a staggering Rs. 2.81 Crore and a Rs.10 Lakh will be an unbelievable Rs.28.1 Crore.
Equity is one of the worst investments in the short run, going up an down but it is the BEST investment for the long term and for your future. Sure you can make money in days and weeks, but you can quickly lose your shirt too. Hence, it is important that you never invest money that is needed in less than 3 years in equity.
Over time, an emerging market such as India will move up as long as growth visibility remains. Given the position of India in the global economy today, you must understand the power of equity as an asset class seriously and give it enough importance in your savings and investment portfolio. Over time, markets have the potential to deliver 12-14% in line with long-term corporate earnings growth. Although equity returns over a period of 38 years have been around 16%, you should plan your savings and investments on the basis of a 12-14% equity return.
How much to invest is a function of your financial goals but I would recommend that money that is not required for the next 10 + years majority of this must go into equity .
All 3 Decisions and Actions.
- Time (Creates Money – Compounding) – At what age did you start investing? Or If you are starting now, What is your age – Enter Here
- Saving (Fuel for Compounding) – What % of your income do you save? – Enter Here
- Equity – What percentage of your saving do you invest in Equity ? – Enter Here.
Once you enter these 3 numbers, we will generate your SET Score – a unique score that will help you achieve your financial goals. The Best have a SET Score of 90+
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