Simple & safe way to invest in equity




By Sanjay Matai

Treat equity investment as a long term one for 10-15 years like your insurance or PPF (or at least as your 5-yr NSC) and you will most probably end up with very good returns

Investing in equity is one of the few ways of making big money—sometimes very big money. However, it comes with the risk of losing money—sometimes the entire amount. Therefore, despite the high potential, investment in equity is negligible when compared to the bank deposits / post-office schemes. The fear of loss is simply too overwhelming.

That apart, investing in equity is not easy.

  • You have to have sufficient knowledge to understand the economy, markets and annual reports.
  • You have to spend considerable time analyzing balance sheets, profit & loss accounts, cash flow statements.
  • You need to monitor your portfolio almost on a daily basis.
  • You may not have sufficient corpus to build a meaningfully diversified portfolio.
  • Due to sharp market volatilities you are never sure when to buy / sell.
  • All the news flow, hype and conflicting opinions in the media only add to the confusion.
  • You cannot depend on the tips as, more often than not, they are a trick to fool you.
  • Time and again the scams in the market have eroded the investor confidence.
  • You have to open a demat a/c.

Given all this, it is not difficult to understand why majority of investors prefer the simplicity & safety of bank / post-office deposits. But there is a way out. Yes, there is a simple and safe way to invest in equity. You can invest in equity without the abovementioned problems. You can invest in equity with practically zero possibility of losing your entire capital. The answer is—SIP in index funds.

Know more about SIP in index funds

  • When you buy index funds (Nifty or Sensex), you are investing in top 30 / 50 companies.
  • No need for you to analyze balance sheets, profit & loss accounts, cash flow statements of these top companies. They are anyway tracked by FIIs, mutual funds & other institutional investors.
  • Corporate governance in these big companies usually good.
  • Due to large equity base and diverse ownership, chances of share price manipulation are low.
  • Scams usually happen in small or medium sized companies. Even if there is a scam in a large company (e.g. Satyam), it may be a one-off case. Moreover it will be thrown out of the index. Thus its impact, over time, will be negligible.
  • Index funds do not require a fund manager.
  • All index funds are more or less same. So no problem of how to choose the best funds.
  • Fund management costs of index funds are amongst the lowest.
  • Since you are investing through an SIP, you don’t have to bother about when to buy.
  • No need to monitor it. When old companies go out and new companies enter the index, the fund will take care of it.
  • You can diversify across the entire top-end of the market even with Rs. 500 / Rs. 1,000
  • No need of a demat a/c.

So investing in index funds is as simple as making a bank FD / RD. Now, let us look at the safety aspect.

I did some number crunching on the Nifty from its beginning in mid-1990s till 1st week of March 2012 i.e. a period of almost 22 years. I worked out the following

What were the returns after 5 years, if a person did SIP of Rs. 1,000 for 5 years (60 months) starting on any given day (around 4,000 data points).

What were the returns after 10 years, if a person did SIP of Rs. 1,000 for 10 years (120 months) starting on any given day (around 2,800 data points).

Here is what I observed

No. of months

SIP per month

Max. Return

Returns

Min. Return

Returns

Avg. Return

Returns

60

Rs. 1,000

Rs.1,74,000

37.14%

Rs. 45,450

-11.40%

Rs. 84,400

12.84%

120

Rs.1,000

Rs. 5,08,000

24.29%

Rs.1,03,450

-3.01%

Rs.2,50,400

13.25%


As you can see, in the worst case the loss was 11.4% in a five-year SIP, and it was 3% for a 10-year SIP.

The average returns of around 13% were far better than returns on FDs (moreover these returns are tax-free whereas your FDs would be taxable based on your tax slab).

Treat equity investment as a long term one for 10-15 years like your insurance or PPF (or at least as your 5-year National Savings Certificates) and you will most probably end up with very good returns.

The writer is the promoter of The Wealth Architects.



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