We Indians have inherited the habit of savings since generations. Earlier, people used to save their hard-earned money to meet planned expenses. They would squirrel away a part of their income by keeping it in some safe location and forgetting it only to look for it when there was a need for funds to meet shortfalls. Wonder whether this will work in today’s time as well? Again, this money was lying idle and not earning anything. Gone are the days when savings were just sufficient enough to meet our future needs. With the changing social structure, increased life expectancy, changing lifestyles and needs etc., one needs something more than just savings.
Another inevitable reason why just savings are not enough is inflation. The price of goods today will not be same tomorrow; money gets dearer with each passing moment. To accumulate wealth, at the same time beat inflation, one needs to invest and not just save.
An investor can invest in various instruments such as gold, equity, debt etc. Each instrument has its unique risk and returns profile and an investor must carefully analyse all parameters before investing. From a long-term perspective, equity as an asset class scores over other asset classes in terms of performance.
Here are a few reasons why investing in equity as an asset class is important:
Higher inflation-adjusted returns
Since investing in equities is akin to investing in the company itself; equity investments generally have the potential to generate higher returns (albeit with higher risks involved). These returns, generally, beat inflation and give the investor real returns on their investment amount over a long term. This coherent nature of equities makes it a preferred investment option for investors who have moderate to high-risk appetite.
Meet financial goals
Different investors have different financial goals such as marriage, buying a house, going on a vacation, children’s education etc. These goals are generally long-term in nature and the quantum required to meet these is high.
The income generated from traditional savings schemes helps to meet financial goals to some extent but they are not enough when inflation comes into play. Equity provides the much-needed push to returns and facilitates a long-term wealth creation opportunity to help achieve one’s goal.
Tax-free dividends & capital gains
Unlike the interest earned on traditional savings instruments, equity investors do not need to pay any tax on the dividends earned. Also, there is no long-term capital gain tax on equity investments held for more than one year.
Easy liquidity option
Most of the traditional saving instruments come with a lock-in period. Early liquidation is not possible in some cases and even if it is possible, it comes with a penalty. An investor tends to lose if he/she withdraws before the said period. Investing in real estate could also be another medium of investment. However, it is fairly illiquid and involves a higher initial investment outlay. In the case of urgent requirement of funds, the investor might not get a buyer or might not get the relevant and appropriate price for the asset. Equity, on the other hand, as an investment provides easy liquidity. There is the complete transparency as regards the exit price and charges if any.
While investing in equities acts as a good portfolio diversifier and a catalyst to returns, it requires thorough research and expertise to pick the right stock. Even after investing in a stock, an investor needs to constantly track not only company’s financials but also related non-financial events and macroeconomic events. Rather than undertaking such tedious tasks on their own, investors can invest in equities through the mutual fund route. There are various benefits of investing in equities via mutual fund:
- Investor need not research each company.
- Facilitates professional management of funds at a relatively low cost. The fund managers are better equipped to take call on investment, given the experience to handle the volatility.
- Enables investor to diversify the portfolio by investing in various companies and sectors.
- A mutual fund provides a facility called as “systematic investment plan, which helps an investor to invest fix amount at fixed time interval. As equity markets are generally volatile and one cannot time the market, it is beneficial for investors to take the SIP route and stay invested during different market conditions.
When it comes to equity investing, an investor should keep in mind that “equity investing requires time in the market rather than timing the market.”
Mutual Fund Investments are subject to market risks, read all Scheme related documents carefully.
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Updated Date: Mar 27, 2017 14:52:03 IST