Equity as an asset class – Part III

Welcome to Part III of this series.  You can read the Part I here and Part II here.

Immediately it struck Ajay – Does this mean, this is the perfect asset class? Should I go in for that PMS investment straight away? Hari cautioned him against the same. For a beginner is best to invest in equity on a periodic basis rather than going for lump sum investments. Plus a PMS scheme may not be the optimal investment mechanism.

This brought smile to Ram’s face. He said, he was now convinced about equity and would start investing based on the trading tips he gets. Again Hari, counseled him about the dangers in direct investing based on rumors.

With a smug look, Bharat turned around to Ajay and Ram – see, I was on the right track all along, right Hari? Hari complimented Bharat on investing his money periodically in equity over the past ten years. He has reaped tremendous returns. Investing via mutual funds is the most efficient way for busy professionals. But if Bharat had continued to invest throughout instead of stopping in 2009 when the market was at a low, his returns would have been even better. Plus it is not a good idea to put all his money in equities.  Proper asset allocation based on your needs and goals is vital. You should then plan the amount you invest in equities.

Hari had some quick closing suggestions for his friends:

  • Equities will give excellent returns in the long run. But they will have high volatility in the short run
  • Investing in diversified equity mutual funds via the Systematic Investment Plan (SIP) route is the best way to proceed and take advantage of the price volatility
  • Over long periods of time, the so-called volatility associated with equity investing gets evened out and you stand to make returns which not only inflation beating but really adds up to your capital

As there are more than a 500 equity funds, his final advice was to find a good financial planner and plan your investments. Once they understand your needs and goals, the planner will help to determine the optimal asset allocation.  They can then determine the right mutual funds to invest in.  But this list should be reviewed on a periodic basis.

On that note the friends parted company and they resolved to be in touch and see how they make progress. Happy Investing!!


Equity as an asset class – Part II

Welcome to Part II of this series.  You can read the Part I here.

Hari asked them to be very clear about their investment objective. If they have a long term vision to meet the family goals of children’s education, larger car and house, retirement etc. then equity should be an integral part of their portfolio.   As the economy moves in cycles, so does equity returns.  When the economy does well, you may expect good returns and when it falters, be prepared for correction in equity prices.

The key to successful investing is asset allocation and they should not invest money they may need in the short run into equity.

He brought out the different features of equity investments.

  • It is one of the few asset classes along with real estate which has the potential to give above Inflation returns in the long run.
  • Investing in fixed income erodes your portfolio due to inflation. The average inflation in the last 10 years is more than 7.5% and during the same period, the average return on Fixed Deposit is 7%.  So, fixed deposit doesn’t protect your investment against the inflation risk.
  • As the Indian economy continues to grow in the long run, equities represent a great opportunity for us to participate in this growth story.
  • Plus even from a diversification viewpoint, we can invest in international funds which give us exposure to global economies including USA, China, ASEAN and Europe.
  • Equity mutual funds are highly liquid. Unlike asset classes like real estate, the money invested in equity is highly liquid and you can get your money quickly.
  • In addition it has one of the lowest transaction costs. When Hari started investing in 2000, the cost of a transaction could be as high as 1% for an equity transaction. Today for direct investments in equity, the transaction cost could be as low as Rs 25 per transaction. In addition for investing via mutual funds, direct plans reduce the cost of investing.

The key point to note here is that equity should definitely an integral part of your long term portfolio.

Hari said, it would be apt to quote Mr Warren Buffet in this regard.

“Think long term and be patient.  No matter how great the talent or efforts, some things just take time.  You can’t produce a baby in one month by getting nine women pregnant”

See you soon in the concluding Part III of this series. 

Equity as an asset class – Part I

At a time when the Indian equity markets are trading near their all-time highs, the retail investor participation in the equity markets has fallen drastically over the past decade. Over the same decade, retail investments in real estate, gold and fixed deposits are nearing all-time highs. In such a scenario does equity have a place in the retail investor’s portfolio? What has been the experience of different retail investors over the past decade and what should they be doing now? Let us look at the experience three individuals have had over the past decade and what they are planning going ahead.

Ajay, Ram and Bharat all completed their education at a prestigious Institution in 2003 and have been working with leading multinational firms over the past ten years. As they have grown in their professional careers, they have invested their surplus money in different ways. They have all purchased gold jewelry in their family and they are very happy with the financial returns this has provided.  The three friends caught up last week for dinner. As they were discussing their financial status it emerged that they were all worried!!

Ajay – the safety seeker

Ajay went by the advice of his father and has invested in“safe” bank deposits and LIC Insurance products. His investments are giving 5-6% after tax returns. He had invested in some insurance products early in his career. When he needed money urgently and redeemed them, he found that they have very heavy upfront charges. To get high returns neighbor has advised him to invest in equity via a portfolio management scheme (PMS). But he has to find Rs 25 Lakhs for this which will mean liquidating his existing deposits and investing the money one time.

Ram – the Real Estate guy

Ram brought a piece of land in 2005. He was very happy with the returns he got and has put all his money in land and in two apartments.  While Ram is happy with the overall returns from real estate investments (18% per year), he has a serious liquidity problem.  The EMI payments for his apartments, take away a big chunk of his salary. When he tried to sell a piece of land, the recent slump in the real estate market has meant that he is not able to find ready buyers.  He can sell his other flat but he faces a big capital gains tax bill. He gets SMS’es with short term trading tips on stocks to buy and is wondering if he should invest as they promise very high returns. He is happy with “even” 25% returns per year.

Bharat – the Equity investor

Bharat’s neighbor has been a savvy investor in equity markets from the 1980’s. He is a mutual fund distributor and through him Bharat has invested his money in many mutual fund NFO’s as well as existing mutual funds. He holds 30 mutual funds and his returns are around 15%. He follows the TV channels daily and they are full of negative news. He did invest a lot of money in 2007/08 but then as the markets went down in 2008 he stopped investing. Now that the market has touched 20,000 again, he is keen to get back in the market. But he keeps reading in the newspapers about how “dangerous” equity markets are for investors. Is he taking too much risk? Should he sell his equity holdings and invest elsewhere?

While the three of them were debating about the best way ahead, who should they see but their college senior Hari!! Hari had always been a smart investor who had brought stocks and made money even while he was in college. Hari joined their table and they described their current dilemmas to him asking for advice on equity. Is equity good or bad? Will Indian equity do well or will be all “gloom and doom”? Should they invest in equity or not? If yes, then how should they invest and for what duration?

Watch this space for more!

Equity as an asset class

Happy New Year 2014!!

There is always a doubt in the minds of the ordinary investors if equity is an asset class she should invest or not.  Should she be happy with investing in time tested avenues like Fixed Deposits, Provident Fund accounts, Gold and Real Estate or is there a compelling need to look at equities to build wealth.  We are going to discuss the various asset classes and going to compare that with equities over long periods of time to help investors decide.

We are going to chronicle this in the form of a story with 4 characters spread over three posts.

Hope you enjoy reading this and wishing you happy investing!!!