CHENNAI: Even as investing in mutual funds have grown popular as opposed to traditional investments like gold, real estate and fixed deposits, equity-linked mutual funds and investing in direct equity is something that is only gaining gradual acceptance among the average Indian investor. Bank of India’s AXA Mutual Fund’s Senior Fund Manager Saurabh Kataria, in a conversation with Gayathree Ganesan of The New Indian Express, breaks down the idea of equity investments and shares tips for amateur investors looking for the best inflation-adjusted returns.
How well is the equity market penetrated in India?
If you think about the equity mutual fund primarily, the market is very underpenetrated. If I were to compare ours with developed markets, our equity mutual fund penetration is amongst the lowest (not even 1/5th or 1/6th of their markets) because of the lack of understanding and acceptance of equity among investors is still very recent.
However, we have very recently seen provident funds investing directly into the equity markets. CAMS data shows that cities like Chennai added nearly Rs 50,000 crore to its equity kitty in seven months, overtaking Mumbai, which added Rs 44,000 crore in the corresponding period.
What are the myths about investing in equity?
Traditionally, an equity investment is directly associated with volatility, which means in the near term, there is a chance that the markets may go down and the mutual fund investments may give negative returns. For instance, the stock markets correct by 10-5 per cent and in the near term, you will witness loss of capital.
But the real risk about equity investments is all about the time you have to float your funds in the market. The longer you stay invested in the equity markets, the better returns you derive out of such investments. Therefore, if you have a longer time period of investment, you generally derive the best, risk-adjusted and inflation-adjusted returns from equities than any other assets.
What are your tips for first-time or amateur investors?
Start early and start investing in equity. The earlier you invest in equity markets, the better chances you get for compounding it over the years. Second, a first-time investor or a young investor should primarily look at equity-oriented funds because they have a long career ahead of them. So, the longer the time period, the better the chances are to get extraordinary returns from equity investments (like a 30-35 year period).
For instance, a person invests Rs 100 every year from the age of 19 until he turns 27 years old, compounding at the rate of 10 per cent and then stayed invested till the age of 62. He does not invest any further money from the age of 27.
The second guy invests the same amount every year from 27 years of age to 62 years. However, the first person who invested money for the initial eight years and kept the investments locked until he was 62 will end up with better returns than the person who invested from 27-64.
What this points out is that the person who starts early and allows the money to compound for longer will end up having a lot more money just by the virtue of the fact that they’d invested earlier.
Therefore, an investment earlier by eight years is equal to almost 35-40 years of investment and that is why starting early is important.