Why Should Indian Investors Invest In Equity Markets? Equities as an asset class has always received step motherly treatment among the various asset classes for Indian households.
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Equities as an asset class has always received step motherly treatment among the various asset classes for Indian households. However, if one goes back in time and sees which asset class has given the highest compounding returns, then Equities stands out right there in the top. Investing in shares of companies is a time tested way to enhance financial stability in the long run and build wealth. There is an old saying from the legendary investor, Mr. Warren Buffett which goes like this – "If you don't find a way to make money while you sleep, you will work until you die". Keeping money in regular savings account is surely not going to make your hard-earned money work and adding some allocation to equities could make that big difference.
Over the last few years, there has been a sea change among Indians who have started increasing their allocations towards equities but still we are hugely under-penetrated and have a long way to go. Investing into equities can be done with directly through buying shares of companies, or through mutual funds, PMS and AIF in a very simplified and easy process.
As an Indian investor, you are presented with a myriad of investment opportunities ranging from fixed deposits to real estate to gold, but equity investments stand out as one of the most promising options. The influential American investment advisor Robert Allen once famously said, "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." This quote highlights the benefits of investing in equity over other asset classes.
Unlocking Your Wealth Potential Through Equities
Looking forward, India is expected to be the fastest-growing major economy in the coming years, with a GDP of $5 trillion over the next five years. This translates to something like a 7-7.5% annualized GDP growth rate. Assuming equity markets have historically given 350-400 bps outperformance to GDP, we are looking at equity markets generating anywhere between 11-12% annualized CAGR return over this period. Which other asset class can match this? With India's stock market presenting a unique opportunity for growth, it is wise for investors to consider investing in Indian equities. However, one caveat which want to highlight here is that, unlike say a fixed deposit, equity returns are not linear and predictable and are lumpier and variable in the short run. Hence a longer time horizon is required for equities.
Here are some of the other advantages of investing in Indian equities:
High-Performing Asset Class
Over the long term, equity investments have the potential to deliver significantly higher returns than other asset classes, such as fixed deposits, bonds, and real estate. Equity has been the best-performing asset class in 11 out of the last 20 calendar years since 2002. Further, since its inception in 1979, the BSE Sensex has grown from 100 to 60000 in the last 44 years, resulting in a remarkable CAGR of 16%, which is higher than any other asset class. This means an investment of ₹5,000 in 1979 would be worth approximately ₹30 lakhs today!
Equity Investments Hold the Key to Achieving Your Long-Term Goals
Financialization of your savings through equity investments can be crucial in achieving long-term financial goals such as buying property or funding education for your children and for your retirement savings. The earlier you start the process of investing into equities the longer period your portfolio gets to experience the power of compounding. Successful investors and entrepreneurs have recognized the potential for high returns in equity investments over the long term. Late Mr. Rakesh Jhunjhunwala, one of the most successful investors in India, had said, "If you believe in the growth prospects of a company, invest in the stock and give it sufficient time."
Beating Inflation with Equities
Inflation has been high for most part of the last two years and is here to stay. If your investments are not generating returns higher than inflation, you are actually eroding the purchasing power of your savings. Equity investments offers this advantage to investors in that they have the potential to provide inflation-beating returns in the long run. Traditional fixed-income investments may not keep up with inflation, as it erodes the value of money over time. Inflation currently stands at north of 6% and post-tax debt instruments fail to give this much returns which only equity investments can compensate with.
Reducing Risk Through Diversification
In the words of Warren Buffet, "Diversification is a protection against ignorance." Diversification is critical to successful investing, and equity investments provide an excellent opportunity for Indian investors to achieve optimum asset allocation. By including equities in their portfolio, investors can reduce the risk of poor performance in one asset class by spreading their investment across different assets. Within equity as an asset class itself, investors can spread their risk further across different sectors, market-caps, and geographies, thereby reducing the impact of any one company's poor performance on their portfolio.
The Passive Income Opportunity in Equities
Equity investments can also provide small passive income in the form of dividends. Dividends are payments made by companies to their shareholders, usually as a percentage of the company's profits. Dividends provide investors with a regular source of income that can supplement their other sources of income. Though the dividend yields would be very less in the range of 1-2%, but nevertheless it becomes a regular source of income in the long run once your portfolio becomes large.
In summary would like to say that with the potential for high returns, the ability to beat inflation, diversification benefits, and the convenience and transparency of investing, equity investments have been the best-performing asset class in India for over a decade. As the market continues to evolve, investors must consider equity investments as a crucial part of their portfolio and take advantage of its numerous benefits for long-term wealth creation.