Invest smartly, secure your future

Swati Kulkarni, EVP Fund Manager, UTIMF, Mumbai

Everyone works towards building a financially secure future, but inflation can become a big hurdle. With the cost of education, health-care, real estate and travel increasing constantly, there is always a risk of insufficient finances unless the return on your savings is higher than the increase in cost.

Why equity products?

Depending on one's financial needs-the quan-tum and time frame-and the risk appetite, one needs to allocate savings to different assets such as fixed deposits, liquid, debt and bond funds or mutual funds, and equity mutual funds, so that a portion of risk-low returns savings are ear-marked for the immediate financial needs and the rest are allowed to grow in equity products over the years. Equity as an asset class has generated higher real return over a long period. It is important to stay invested patiently for long-term to generate wealth and not get perturbed by the volatility in the short-term during which the equity products typically see a temporary fall in their overall performance.

How should one take exposure to equity?

Investing directly in stocks can seem exciting, but it is extremely risky. Mutual funds provide a methodical, fundamental, and research-based approach to investing. A team of fund managers and analysts study the companies in detail by analysing not only the financial numbers, but also, by meeting several stakeholders, competitors, and regulators. Also, since mutual funds work on the principle of pooled investment, the investor owns a diversified portfolio of companies at a very minimal cost.

What are the different types of equity products?

Equity products are classified depending on the investment universe that they commit to, for example, there are products in large-cap, mid-cap and small or micro-cap companies or under a specific theme like infrastructure, agriculture, lifestyle, multinational companies, or in a particular sector such as banking, auto, or pharmacy. Usually the risk is positively correlated to the return, which means higher the risk, higher is the return expected. It is advisable to invest 50 per cent of one's equity allocation in large-cap diversified funds, which are relatively less volatile. Thereafter, investors can choose to invest 20 per cent to 25 per cent in mid- and small-cap funds, 10 per cent to 15 per cent in thematic funds, and 5 per cent to 10 per cent in sector funds. Sector funds carry the highest risk as their investment universe is restricted. Further, there are products categorised as balanced funds that combine equity with other asset classes.

Is there a specific time when you should invest in equity?

Are you allocating enough funds to equity to secure your future is the question you should be asking. To receive real returns over the long-term, investing in equity products on a regular basis and in a disciplined manner is crucial. Market fluctuations don't matter much here. According to a study of the past equity market data, excess return over 15 to 20 years was less than one per cent per annum, if we assume that the investor invested in regular tranches in BSE sensex on the days of correction. There are smart investors who understand the importance of regular SIP (systematic investment plans) and they earmark these savings for specific financial needs too.

How to increase chances of returns from equity?

Besides investing regularly in equity products, you can invest aggressively when the markets are bearish and participants are pessimistic about the short-term outlook. In practice, this is tough as the immediate on equity products can be subdued, and lower than returns on debt funds and fixed deposits. One needs to invest patiently, as the returns can be far superior over a longer period.