Keeping money in fixed deposits is not investing. If you had put Rs 1,00,000 about 30 years back, your money would have grown over 13 times. The same amount would have surged 53 times had it been invested in equity markets.The reality is that when you give your money time to grow, the combination of equity market returns and the power of compounding take it to a new level.
Many a time, people talk about the ‘right’ time to start buying shares or equity mutual funds. They often ask friends or someone who has already done that before. The quest for the right time to buy equity shares or equity-linked mutual funds often results in people indulging in procrastination. They do not take any action. They let their money stay in bank deposits or gold or property.
This is an opportunity cost. Idle money in bank or money in bank fixed deposit is not an investment. This is because inflation eats into the value over the years. A timely investment action ensures the benefit of market-linked returns.
Those who realise the importance of investing in equity markets also keep wondering about the ‘right’ time. The information associated with equity markets is considered difficult to process. Most of them steer clear and remain ‘hesitant’ investors. About 80 per cent of trading accounts with brokers are said to be ‘dormant’.
Stock market investing is a skill. Fund managers at mutual funds are trained in this skill. Or at least they are supposed to know it better than individuals with limited knowledge of finance. Their income depends on the performance of their mutual fund scheme or stocks in the portfolio.As individuals, it is increasingly getting hard for people to outsmart the knowledge-led methodology. Technology is humbling the best fund management minds too. Artificial intelligence is threatening to hurt the fund management profession.
In the light of all this, individuals have their job cut out. If they believe in the philosophy of letting the money grow, they are better off investing regularly in a well-diversified equity fund over their working years. For this, they need to accept clearly that fund managers know better than them and they are capable of taking the right call at the right time.
Those who invest directly must learn to look at the big picture. The concept of market value is relative in nature. It is a marketplace because someone believes the price of shares is cheap and someone believes it is expensive. Since share prices follow future profit growth, it is also a belief of what one thinks future profit growth is likely to be. It is not necessary for many people to think the same on value. Someone may find a future upside in the distress that a company faces or may see red flags in an ongoing rally in a particular stock.
During stock market cycles that go up or down, you may end up entering the market at a level where the current and the near future growth in profits is priced in. This is the top of the market valuation cycle. If your goal is to stay invested in the stock market for the long-term, this should not bother you. Over a long period of time, stock markets go through multiple valuation cycles. So even if share prices fall after you invest, you can use that opportunity to buy more of the same stocks or equity funds. That way your average cost of acquisition goes down and when the market cycle turns, you benefit from the upside. This is assuming you are invested in fundamentally strong companies or mutual funds that have a solid track record.
The trick is to not panic when share prices fall and not get too excited when share prices are at the peak. A lot of the timing bit depends on your temperament and the perception of value.
Choose wisely
There has to be a good reason for you to buy shares or equity-linked mutual funds. These reasons have to be aligned with your life goals or long-term needs.
77%
Indians do not bother owning financial assets, according to a comprehensive household finance study done by the Reserve Bank of India last year
(Author is publisher and founder at Simplus Information Services Pvt. Ltd.)