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 comfortable way.
#1: 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.
#2: 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.
#3: 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.
#4: 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.
Conclusion
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.
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