Equity is one of the most rewarding asset classes in the long-term. Not only does it substantially beat inflation, investment in equity or equity-oriented instruments helps create enormous wealth if invested with a 10-15-year perspective. Having said that, from the short-term perspective it is also one of the riskiest asset classes given the extreme volatility in the underlying securities. Hence, investors with a moderate to high risk appetite may consider investing in equities with a long-term perspective.
Why Invest in Equities?
Simply put, the amount of money invested in the shares (stocks) of a company is classified as equity investment. When you buy shares of a company, you become a shareholder in the business of the company. If the company's business grows so does the value of its shares and thus the value of your equity investment. In other words, an equity investment offers a shareholder an opportunity to participate in the growth story of the company.
Ways to Invest in Equity
Broadly, there are two ways to take exposure in the equity asset class. Either one can invest directly in stocks of the companies or take the indirect route of investing through professionally managed equity mutual fund schemes. The first option should ideally be chosen by those investors who understand the nuances of stock markets, have knowledge as well as time to track the capital market on a regular basis and have expertise in stock picking. On the other hand, those investors, who lack any of the above mentioned requisites, should prefer the mutual fund route to take exposure to equity markets.
Equity Mutual Funds vs Direct Equity Investment
When investing, managing risks in an investment portfolio should be given at most importance. However, often investors tend to overlook the risk factors due to which the overall investor experience turns out to be sour.
When buying shares of companies directly through the stock exchanges, the portfolio tends to be vulnerable to asset concentration risk. Even when trying to diversify the portfolio, investors tend to goof up on the asset allocation mix. As a result, what occurs is that the portfolio gets tilted towards a particular asset class or a set of companies, thereby elevating the risk in the portfolio. Given these challenges, direct equity investing on sustained basis is not a cup of tea for majority of investors.
It is here that equity mutual fund schemes come as an instant rescue for investors who wish to create wealth from stocks but lack the expertise or the wherewithal to do so. Mutual fund is professionally managed with an aim to deliver risk-adjusted yet inflation-beating returns over the long-term. By opting for mutual funds, an investor gets access to a diversified equity portfolio thus balancing out the risks and yield performance.
Benefits of Equity Investments
Though there are several benefits of investing in equity as an asset class. However, the most compelling is the ability to beat inflation substantially and its compounding nature over long-term leading to wealth creation.
a) Inflation-beating returns: Since inflation is often an unnoticed financial menace which dwarfs the value of your portfolio, it needs to be highlighted that unless the investments are beating inflation, they make absolutely no sense. The long-term average CAGR returns from equity or equity-oriented instruments indicate a healthy growth of 12-15%. This is not only much higher than what other investment avenues offer but also it can decisively dwarf the potential impact of inflation on the portfolio.
b) Opportunity to invest across businesses: Another major advantage of equity is its ability to offer investors an opportunity to invest across sectors and market capitalisations. In this manner, you get to participate in the growth stories of multiple businesses in a seamless manner. As the company grows in scale and profitability, an investor gets to participate in the growth story of the invested companies by way of increase in share price.
To conclude, equity is among the best investment avenues for inflation-beating wealth creation over the long term. They are capable of fulfilling all the long-term financial goals like retirement, children's higher education and their marriages, achieving financial independence etc. if invested early on with a long-term vision.
NOTE: This article was authored by Amandeep Singh Sasan, a Mutual Fund Distributor and is published here as part of a marketing initiative. It contains no journalistic inputs from CNBC-TV18, its affiliates, or employees.
