Why should I invest in Equities?
- December 8, 2021
- Posted by: MvM Team
- Category: Equity
To beat inflation and earn handsome returns on investment in the long run!
Equity is a high risk and high return investment, ideally suited for long term goals. There are many potential benefits of investing in equities. However, like any other investment, there are risks associated with equities as well.
If your goals are at least 5 years from now, you should have some exposure towards equity; as in the long run, equity has the potential to give higher returns than other investment avenues. However, you must have adequate knowledge and skill to analyse the shares of the companies you want to invest in and the patience to stay invested as stock markets are volatile.
Types of Gains
Dividend: Proportion of the profits that the company distributes to its shareholders.
Capital gain (loss): Increase (decrease) in the price of shares.
Let us understand with example:
Aditya is a college student who has a decent knowledge of financial markets and the economy. He plans to invest in stocks. His uncle, Ravi, suggested him to go for a safer option of Fixed Deposits in XYZ bank. By investing in FDs, he can earn an assured return of 7% per annum on his investments.
Now, let’s compare two scenarios, one where Aditya invests in Fixed Deposits for 5 years and other, where he could have invested in stocks.
Initial Investment= ₹2,00,000 | ||
Year | FD Value | Nifty50 return |
1 | ₹ 2,14,000 | ₹ 2,27,200 |
2 | ₹ 2,28,980 | ₹ 2,58,099 |
3 | ₹ 2,45,009 | ₹ 2,93,201 |
4 | ₹ 2,62,159 | ₹ 3,33,076 |
5 | ₹ 2,80,510 | ₹ 3,78,374 |
Interest rate on FD ~7% pa
Return on Equity ~13.6% pa (Nifty50 return for FY 2016–2021)
Aditya chose to invest in FD rather than equity and therefore, missed out on an opportunity to earn additional return.
MvM View:
To invest in the stock market, one must have the requisite knowledge and skill to know which stock to buy at more importantly at what price. There are various methodologies to analyse the shares of a company.
You should not get fascinated by the idea of investing and earning superlative profits overnight. Investing in the stock market is a steady and comprehensive process. A well planned and long-term investment strategy can result in profits when invested consistently.
