"One of the most important things every investor and cash holder
must cognize: never let your emotions persuade your investment decisions."
One of the main
reasons why people move towards towards investing in stocks is the possibility
of making quick money and to get rid of job life. While that does sound
enticing, especially when you're old, you need to be smart about where you
invest your money. Having said that, there are mainly two ways of making money—by
working, or by making your money work for you.
Not everyone
likes equity investing. Some equate it with gambling; some see it as a zero-sum
game, and therefore, wasteful; some are suspicious because money seems to be
made easily; some dislike anything that does not come with guarantees.
But rather
than keeping your cash stashed away if you choose to invest your money in
equity, then you're getting your money to create more money in the form of
higher returns. Another way is to let your stock grow in value and then buy and
sell them at a profit.
Generally,
the word 'Equity' is closely associated with 'Risk' and it is rightly so.
However, it is important to have an Equity component in the portfolio as a part
of asset allocation and portfolio diversification,
If you're a
part of the Public Provident Fund scheme offered by the Indian Government,
you've already taken part in India's tried and tested way of getting long-term
returns.
However, PPFs
and Fixed Deposit offer lower returns when compared to stocks. That is why
stocks are the best way to boost your retirement amount.
"The
wealthiest people in the world today are equity investors. Don't get left
behind because you don't understand how a business should be run".
The benefits
of having 'Equity' in a portfolio:
· Helps in beating inflation
· Assists in portfolio diversification
· Excellent Return on Investment in the Long-Term
· Regular Income by way of "Dividends"
This is the
simplest reason to invest and is often at the core of why people buy stocks.
Saving
or Equity Investing:
Saving is the
safer route because the dollar amount in your bank account won't typically
decrease unless you withdraw funds, but interest rates on savings accounts
don't allow your money to grow very quickly. Unfortunately, interest rates are
often lower than the rate of inflation. This means your savings could lose
purchasing power over time.
Rightly said:
"Putting
your money in the securities market is risky yet profitable. Whereas, holding
that cash is ineffectual".
When choosing
rightly, you can grow the money you invest by anywhere from 10%-12% per year
over the long term in Equity as compared to a saving account that gives you not
more than 5%-6% yearly.
If you invest
Rs.30,000 in the stock market today and it gains roughly 10% per year, you'll
turn that Rs.30,000 into Rs.78,000 (approx.) in just 10 years.
Think about
that.
Imagine 10
years ago you put Rs.30,000 into an account, invested it in some stocks, made
some trades, and now 10 years later you have your original Rs.30,000 plus
another Rs.30,000 you made from investing.
Or imagine a
longer-term example where you're both a good saver and a smart investor.
Imagine you invest Rs.30,000 of your savings into the market every year for 30
years.
That's
Rs.30,000 this year, another Rs.30,000 next year, another Rs.30,000 the year
after that, and so on for 30 years. So, in total, you will have invested
Rs.900,000 in stocks over 30 years (Rs.30,000 per year x 30 years).
And let's
assume you achieve the same average yearly returns we used above, 10% per year.
So, you've
invested a total of Rs.900,000 over 30 years — but guess how much you have in
your account at the end of that 30 years.
You know it's
going to more than the Rs.900,000 you invested over 30 years because the money
will have grown. After all, you invested it in stocks.
But it's how
much it's growth that's truly surprising. That Rs.30,000 investment per year
for 30 years would now be worth Rs. 54,28,303
Bottom
line — through regular investing, you can turn Rs. 30,000 per year
into more than a million over 30 years.
Now, Rs.
900,000 of that million is the money you directly invested each year. But the
other Rs. 45,28,303 is money you made from investing in stocks.
Investing
in Equity or Fixed Income:
Equity
investing has the potential for a higher return on your money than fixed income
investing. If you invested in the stock of a particular company that has good
management and valuations and also potential of attaining good profitability in
future, you could experience a large return on your investment.
Whereas the
low return on most fixed-income products can mean your investment might not
even be able to keep pace with the rate of inflation, which in effect means
that you're actually losing money in the long run.
Let's
understand this by way of the below illustration:
If a debt
scheme can double your money in 7 years@12% p.a. The Equity schemes can double
it in 4 years@20% p.a. If you have invested Rs. 100,000 for a period of 20
years. It can be clearly seen here that the small difference in %age return can
make it big in the long term. Rs. 100,000 invested at the rate of 12% for a
period of 20 years would give you Rs. 9,64,630 and the same amount invested at
the rate of 20% for the same period would give you Rs. 38,33,760
Whether
equity or fixed-income products are right for you will be determined in large
part by your tolerance for risk. If you're something of a riverboat gambler,
you may prefer equity products. If you still have your first piggy bank and it
still contains the first pennies you ever owned, the safer fixed-income track
may be better for you. You can also strive for a balanced portfolio by
investing in a combination of fixed-income and equity products.
Investing by
yourself is thrilling, but fraught with mistakes as you climb the learning
curve. Choose your pick but do choose equity.
So, what is
stopping your money to grow….
Open your eyes to a fresh financial perspective.
"A
whole new look at Personal Finance - to make it simple, accessible and workable
for all"
Author Bio:
Rashi Sadhu is a Financial Planner and a Finance Content Writer. She’s on a
mission to spread financial literacy. She believes financial freedom should be
a vital goal for every common person. Her passion involves writing poetry on
real scenarios
Connect with her on twitter: https://twitter.com/RashiSadhu
Sources:
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