Equity Investment the bedrock to Financial Planning


May 2014 I got my first salary in bank. I was excited and thrilled. At the same time I was grounded. I always knew the importance of saving. But I didn’t just wanted to save I wanted to invest.  I had no clue of how to go about doing that. I was overwhelmed, confused and scared.
Fast forwarding the story to October 2015.

In last 18 months I have an emergency fund, I have fortified my financial health by buying a health insurance, a life insurance and a personal accident policy. I have invested small amount in 3 companies and I have a SIP (systematic investment plan ) in a mutual fund. I did all this without paying for any professional advice. By doing online research, reading books, magazine and posting questions on online forums like Asan Ideas for Wealth, Subramoney and Freefincal.
I am sure I don’t have to convey the importance of saving and investing to audience reading this! But what I have learned is that most people don’t plan their savings in an intelligent way. Their savings and investment are guided by their fears and friends. People don’t do enough research before investing as much as they do before buying a car ! This may be one reason many people stay away from investing in equity.

I believe that everyone should invest in equity. I want to make my case by using both emotion and logic.

What happens to people who don’t invest in equity ? Do they lose their savings ? do they go bankrupt ? Do they have to borrow money from other ? No none of the above horrible thing happen to them but their is a silent killer, a slow, poisonous rodent that squeeze your wallet – Inflation

1) Inflation will eat away their savings
The inflation rate in India has been around 3-7 %. What is the best returns that you get from a bank account or gold is only around 8-9%. But you also have to pay tax on that.
So in reality what you are getting out of your investment is just 2-3%. Which is less.
2) Life style inflation-  The amount of milk you consume will increase as your child will grow up. The next car that you want will be bigger than the current car you have. 2-3% of net gain will not be able to sustain this life style inflation.

Now coming to some of the myths that people have regarding equity Investment

1) People think it is difficult
Yes, it is difficult than opening a RD or FD or buying a LIC policy from agent but it is no rocket science. If one is looking forward to learn there is plenty of help available online and in real life.

Last month I hosted a financial meetup. It was a terrible failure. Only 11 people turned out from entire NCR. But in that I was lucky enough to meet an inspiring elderly couple named Mr and Mrs Iyer. They had just retired from a bank after working there for entire life. The only savings they knew was bank deposit. They recently  got a lot of money from their VRS and pension fund. They wanted to explore productive ways to deploy that money and thus were learning about equity investment at the age of 60! For me, they are the living example of the Quote, “Its never too late to be what you want to be”

I never said that if you have 100 Rs invest all 100 in equity. The exposure to equity should be based on your age, risk appetite, goal for which you are saving etc. The general rule of thumb is if your age is 26, like me, you should have  (100-26) i.e 74% exposure to equity.

2) People think equity investing is investing only in stock market
Directly buying stocks is only one way to invest in equity. There are also easy ways through mutual funds. Mutual fund industry is highly regulated and  transparent. If one doesn’t want to take risk with stocks, mutual funds are perfect way to invest in equity.

3) People are uncomfortable with volatility
Any equity investment fluctuates daily in price. On one day a unit is worth 12 Rs per on another day it would be 14 and yet on another day it could be on 10. If you monitor your unit price daily you will find it difficult to invest. The key to equity investment is to be in it for long time. Now, long doesn’t mean eternity. Long means if you are planning for your children’s education or your retirement and that goal is 15 years away than you have to stay invested in equity for 10-12 years. Once the goal is near you can shift the money to a safe investment like FD

To conclude the benefits of equity investments are many. It is liquid, provide tax benefit etc. But the biggest advantage is that it is the investment which provides highest returns. That is reason enough for me to learn about it !

Feel free to share your views and comment.


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