In the world of investments, your biggest enemy is the inflation. As you work hard to earn a meaningful living, you constantly strive for more because the prices of things keep rising. The official consumer price inflation data may say one thing, but inflation is the daily price for consumption. You know things to do to ensure that you are not letting that demon eat into your wealth.
You must ensure that equity and equity-linked assets are always in your portfolios. A primary reason is equity assets outperform all other asset classes convincingly to give you the highest return. If you invested R50,000 yearly since 1994, you put around R14.40 lakh. That money is worth R58.8 lakh today if you had invested in a fixed deposit and R70.2 lakh if you had invested in a public provident fund. If you had put the same money in gold, it would have been worth R1.2 crore. You would feel pleased about that. However, an investment in the Nifty 50 index would have propelled your R14.4 lakh into R2.8 crore.
At an average 6.3% inflation rate in those 30 years, you must adjust your savings by R47 lakh for inflation. With fixed deposits and PPFs, you are barely adding to your wealth. While gold has given you a decent return, it is probably not enough to pay for retired life. The data underscores the need to add that equity muscle to your portfolio.
However, financial markets are about future returns. Very few experts anywhere in the world argue against India’s steady economic growth and consistent profit growth of Indian companies. Stock market returns typically follow the trend in profit growth.
In 1994, your awareness of equities was minimal, and your participation in equity markets was barely anything. Today, there is a surge in the demat accounts, trading accounts, and investor accounts for stock market trading. The National Stock Exchange recently celebrated ten crore investor accounts. That number will likely continue as it is a fraction of the potential.
Index investing
There is always a burden of lack of knowledge when investing in equities. You suffer from an inertia for learning anything new after your formal education. Those who enter the equity markets are quickly attracted to high-intensity stock market trading activity like day trading or options trading. The idea is primarily to make a quick buck. You need not follow the same path.
You must tell yourself that equity assets are necessary to beat inflation. That does not mean you have to dive deep and master derivatives trading. You can get a professional advisor to help you determine the suitable instruments that align with your financial goals. In the 90s, there was no concept of an index fund or an exchange-traded fund. Today, you can invest in an index fund or an exchange-traded fund by tapping your smartphone.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)
A commitment to passive investing can dramatically make a difference in your retirement savings. There is no guaranteed return here that the Nifty 50 companies would maintain a specific 14% return. However, empirical historical data suggests allocating money towards equity assets makes common sense. That has happened for decades, and there is no reason why equity assets cannot outperform other asset classes going forward.
What can you do
The first step is to ensure that an asset allocation plan is drawn. Even if you feel edgy about equity markets, you must get professional help to choose the correct index or mutual funds. A lot of literature online can help you make sense of mutual funds or index funds. Your learning must be limited to the significant picture impact on future profits. You do not have to analyse every sector or know when to enter the market or exit. There are a lot of warnings issued by the government against speculative trading.
At the same time, even mutual funds carry risk meters that show their risk level. The empirical data on the Nifty 50 returns suggests that over the long term, there is little excuse not to own equity assets. You do not have to be an expert; you just have to be smart.