Equity is the go-to asset class if you are looking at long-term appreciation.
As a young investor or someone starting his investment journey, the biggest conflict you may
face is where to invest. Financial planners suggest starting early & building a strong equity
portfolio. In this article, let us discuss some compelling reasons why you must consider having
an equity exposure in your portfolio and how it can help you achieve your goals in a
Equity has proved to be the best performing asset class in long term:
Statistically, equity returns over the long-term horizon are way above other asset classes like
debt, real estate and gold. For example, had you invested a lump sum on Jan 1, 2000 in
Franklin Prima Fund, which is an equity oriented mutual fund, you could have earned an
annualized return of 20.36%. This is way more than other asset classes and could have helped
your wealth creation goal in a big way.
Returns from equity beat inflation
India has historically had a history of moderate to high inflation. Our inflation has hovered in
the range of 5-8% and has proved to be a silent killer for investors who had not looked beyond
fixed income in their investment portfolio. In this scenario, as a prudent investor, before
selecting an asset class for investment, one must see the “real” return. Real Return is nothing
but the nominal return less inflation. For example, if you invest in a bank FD which earns you
7% after tax whereas inflation stands at 8%, the FD is not creating but destroying your wealth.
Compounding can help magnify the returns from equity
As per the legendary Albert Einstein, compounding is the eighth wonder of the world. When we speak
of the benefits of higher returns from equity as an asset class, it may be noted that the benefits get
magnified over a period of time as they are compounded. For example, Rs. 5,000 invested every month
for 25 years in a fixed deposit yielding 8% will generate Rs. 47.55 lacs at the end of 25 years whereas
the same amount, if invested in an equity mutual fund that earns an annualized return of 15% will
create a corpus is Rs. 1.62 crores, and that is a whopping 341% over and above FD returns.
Equity can help you start small towards your financial goals
The best thing about equity is that the investment amount one requires to achieve a financial
goal is pretty low. This is mainly due to the long investment horizon. For example, let us
assume you wish to plan for your daughter’s marriage in the next 25 years. Let’s assume
inflation @ 8%. The sum required after 25 years is Rs. 68 lacs. Now, if you plan to invest
monthly for this goal in a recurring deposit that yields 8% p.a., you will need to invest Rs. 7,153
per month. However, if you plan to invest it in an equity mutual fund, you can do so by
investing only 2,085 per month, which is a good 70% lower.
Equity returns may be volatile in the short run. However, equity will also be the best asset class
for you to invest for your long-term financial goals. Start early, invest systematically and stay
invested for long periods.