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    Don't shun equity: A monthly investment of Rs 5,000 could make you a crorepati

    Synopsis

    Equities are volatile and can lead to losses. But if chosen wisely, they also give the best returns. Here’s why your portfolio needs this moneyspinner.

    ET Bureau
    Thirty-years ago, had you invested Rs 1 lakh in UTI Mastershare, it would have grown to Rs 71.8 lakh. During the last 30 years of its existence, India’s first net asset value (NAV)-driven mutual fund has generated returns at a fabulous compound annual growth rate (CAGR) of 15.31%. Also, it is not the only equity scheme to have delivered superlative returns. And yet, retail investors continue to shy away from investing in the stock market. The share of domestic retail investors in Indian equities, which has almost been stagnant for the past six years, is barely 7-8%.

    Even as inflows through the mutual fund route have been on the rise for the past two years—mutual funds’ cumulative holding in BSE 200 companies has risen from 2.68% in June 2014 to 4.32% in June 2016—the combined Indian retail holding is just 11.99%. This is in stark contrast to foreign investors who have been eager to cash in on the opportunity that the Indian stock market provides. Foreigner portfolio investors’ (FPIs) holding in the BSE 200 stocks has risen from 17.25% in June 2010 to 24.86% in June 2016.

    Few domestic takers for equities
    Retail investors’ interest in equities has risen only marginally.
    Image article boday


    *Foreign Portfolio Investors (FPI) now hold close to 25% of Indian equities and this increases the risk triggered because of global events.
    *Retail participation which is almost half that of the FPIs has seen a rise in the past two years through the mutual fund route.

    The risk of staying out
    While equity investments carry short-term risk, avoiding the asset class altogether, say experts, is no less risky from a long-term perspective. This is because Indian equity market has generated better returns compared to other asset classes and is expected to do the same in the future. Even from a tax-saving perspective—given that for a large number of domestic investors investment is synonymous with tax planning—the equity-linked savings schemes (ELSS), which offer tax benefits, have outperformed traditional debt products such as the Public Provident Fund (PPF).

    SBI Magnum TaxGain 1993, the ELSS scheme with the longest available NAV history, has generated an annualised return of 16.73% during its existence of 23-odd years. This is markedly better than the 8-9% returns given by the PPF during the same period. The lowest return that SBI Magnum TaxGain 1993 generated was 12% between 2000 and 2015, still higher than the PPF. This is yet another proof that, over the long-term, the risk-reward profile of equity is markedly better.

    ELSS not risky in the long-term
    Equity-linked savings schemes are a much better tax-saving investment option.

    Image article boday

    Since the Indian equity market is now much more developed compared to the eighties and the nineties, those looking to invest now need to moderate their return expectations. But, even at a moderate return, equity can still help build a bigger corpus for you. At a CAGR of 8%, a monthly investment of Rs 5,000 in a debt instrument will grow to Rs 70.88 lakh in 30 years. But if you put the same money in an equity-based instrument that gives 12% compunded returns, your corpus will be more than twice as big at Rs 1.54 crore (see chart below). Even investors who don’t have a huge surplus to invest can gain from small but regular investments in equities.

    Equity-based instruments can make you richer in the long-term
    Due to power of compounding, even a 1-2 percentage point higher return can yield a much bigger corpus than what a pure debt-based investment will deliver.
    Image article boday

    *The accummulated corpus will be significantly higher in the long term, even with minor increases in annual compounding. The higher the share of equity, the greater will be the returns.
    *Assumption: Rs 5,000 invested per month for 30 years.


    Why investors stay away
    Despite the fabulous wealth generation opportunity that the stock market provides, too many investors shun equities altogether. Many of them stay away because of their previous bad experience with stocks. Stocks can be volatile. The markets fell by more than 50% during 1992-93, 2000-2001 and 2008-9, only to bounce back and generate decent average returns for investors who stayed put. However, often investors need money and are forced to exit the market at a loss, resulting in a fear for equity investing.

    Meet Deepak Rawat, 31, who had to exit the stock market when he needed money urgently during the 2008-9 bear market. Now his portfolio includes only ‘safe’ products such as bank deposits and PPF. “I prefer PPF over equity mutual funds for my children’s education goals. I don’t want to get into a situation where I can’t withdraw money, without making a loss, because the market is doing bad,” he says.

    Investors like Rawat who have burnt their fingers have a reason to be sceptical of the market. However, often the suffering is a result of ill-informed decisions. “Too often, investors take random advice from friends, relatives, etc. when making investments, and they don’t know when to exit,” says Dinesh Rohira, Founder and CEO, 5nance.com. “Stock market investors need mentors to guide them when to invest and when to withdraw,” says Vikram Dalal, Managing Director, Synergee Capital Services.

    This guidance can be based on broader market views such as reducing exposure when the market is overvalued, or based on goal duration—all advisors tell investors to reduce equity exposure well before the goal date. Maintenance of a readily available emergency fund (mostly in debt instruments) will also reduce the need to withdraw from equities during bear markets.

    Volatility scares
    Returns from equity are drastically different for different time period. Scores of investors want steady returns and don’t like high volatility in returns. Abhishek Jain, 35, an IT Professional, completely avoids investing in stocks. His reason: “My sleep also has some value. I don’t want to lose it by investing in stocks and then worrying about what is happening in the country and across the globe.”

    He is not convinced about the long-term benefits of stock investing either. “Equity mutual funds talk about investing for the long-term. What is the guarantee that these funds or their fund managers will be there in the long term?” Where does Jain park his money for long-term goals like his child’s education? “After my son was born, I started a PPF account. This is a tradition. My father had also started a PPF account for me,” he says.

    Though equity mutual funds give out historical returns, they also point out the risk of equity investing: ‘past performance is not an indication of future returns.’ This highlighting of risk is a turn off for investors. “Mutual funds are good at marketing and they showcase good historical returns to stoke your greed, but they can’t give any assurance about future returns,” says Jain
    Image article boday

    Abhishek Jain, 35 years, IT Professional
    Annual income: Rs 10 lakh.
    Savings mode for long-term goals: PPF.
    Why he avoids equities: “I don’t want to lose sleep over what is happening in the economy and across the globe.”


    How can investors be made more receptive to the idea of investing in equity? Introducing entirely risk-averse investors to debt funds, say experts, can be a good start. “Since liquid funds are much better than savings account, starting with them is the best option. Then investors can slowly get into other debt products. Learning about the volatile debt market is the first step,” says Naveen Kukreja, CEO and Co-founder, PaisaBazaar.
    Image article boday

    “Risk-averse investors can start by investing in liquid funds and then graduate to equity funds.”
    Naveen Kukreja, CEO and Co-founder, Paisabazaar


    Once investors get comfortable with the volatility in the debt market, they can be introduced to equities gradually. “Advisors need to show investors that a small exposure to equity will increase their return without increasing the risk by much,” says Rohira. “They need to restrict exposure to 5-10% in the beginning and, once investors start seeing better returns, they will be willing to invest more in equity,” he adds.

    Financial illiteracy
    Despite the efforts by the industry, regulators, and the financial media, financial literacy is still very low—even among well educated professionals in the financial services sector. “I have never thought about investing in equities. Maybe I will start investing from next year,” says a senior employee of an insurance company. His entire savings are in bank deposits and other debt products. “Most investors stay away from products that they don’t understand immediately,” says Kukreja.

    There is even a set of investors that views stock exchanges as gambling dens at worst and centres of speculation at best. “Longterm equity investing is not speculation, but some people still believe that teen patti (a card game) can yield better results than investing in equities,” says Amol Joshi, Founder, Plan-Rupee. Financial illiteracy and lack of awareness about the real returns—adjusted for inflation and tax—is a key reason why investors continue to put their money in bank FDs.
    Image article boday

    “Some people still believe that teen patti (a card game) can ​ yield better results than investing in equities.”
    Amol Joshi, Founder, PlanRupee


    “FDs give negative yield after adjusting for tax and inflation. But most investors don’t understand this,” points out Rohira of 5nance.com. The impact of negative real returns will be particularly pronounced for long-term goals such as retirement planning. “Since FDs generate negative real returns, investors will miss out on the compounding effect. If they rely solely on FDs, chances are, they’ll run out of funds in the middle of their retired life,” says Sharad Singh, Founder and CEO, Invezta.

    Lack of time and expertise
    Time crunch also plays a role in keeping investors away from the stock market. “I used to invest in equities directly, but am no longer doing it because of time constraints,” says Kishore C.V., 45, a marketing professional (see picture). While it’s sensible to not invest in stocks without adequate research, which can be time-consuming, Kishore has the option of taking the mutual fund route to equity investing. Instead, he has started putting money in debt products and other low-yield instruments such as life insurance policies (four) and pension plans (one). Since he has 15 years left for his retirement, re-focusing his portfolio through equity funds could be much more rewarding for him.
    Image article boday

    Kishore C.V., 45 years, Marketing Professional
    Annual income: Rs 15 lakh.
    Savings mode for long-term goals: PPF, FDs, NSS, four LIC policies and one pension plan.
    Why he avoids equities: “I used to invest in equities. But now I don’t have the time to do the research required to pick winning stocks.”


    Some investors have a fair understanding about stock market risks and know that they may not be in a position to handle equities all by themselves. “I don’t have the level of expertise needed to invest in the stock market, so, I plan on finding a good portfolio manager,” says Sagar Maru, 30, a banking professional. Instead of opting for the expensive route of personal portfolio managers, just like Kishore, Maru too has the option of investing in equity mutual funds.
    Image article boday

    Sagar Maru, 30 years, Banking Professional
    Annual income: Rs 8 lakh.
    Savings mode for long-term goals: First priority is to pre-pay loans, will plan long-term goals later.
    Why he avoids equities: “Don’t have enough expertise, plan to go only after finding some good portfolio manager.”


    There are also equity traders who have a problem when it comes to investing money in equities for the long-term, showing that even some market participants do not fully appreciate the power of long-term equity investing. Hiren Sanghvi, a proprietary stock market trader is a case in point. “My main source of income is from the equity market, so I want to keep my long-term investments away from equity to reduce risk,” he says. Most of Sanghvi’s long-term goal planning relies on PPF and real estate investment.

    As stated earlier, it is actually short- to medium term equity investment that carries a significant but giving it time bears results. However, investors should keep in mind that currently, we are in a period of high risk: The valuation of the broader stock market is trading above its historical average, and though the domestic holding is increasing, it is still not enough to counter the weight of the FPIs, so the risk to the Indian market, triggered by global events remains particularly high.

    Continued monetary expansion by global central bankers to keep the market at higher levels is also increasing the risk—market may tank as soon as liquidity tightening starts. However, investing slowly into the market using systematic investment or systematic transfer plans can help reduce risk. Also: “Since the risk level now is high, it is safe for investors to route their new investments through balanced funds,” says Vikram Dalal, Managing Director, Synergee Capital Services.

    Also read: How to bring retail investors into the stock market

    Also read: Life is never a straight line, nor are returns from stocks

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