Why To Opt For Equity Investment?

Quite often we are asked, why should one invest in equities. The Indian economy is gloomy. Political instability tends to hog most pages of the newspapers. The global economy is not supporting the news flow in any way. In this uncertain scenario, why should one take a Risk At all? Why not put all your money in a safe haven of ‘Debt’.

Firstly, we are living in an environment where inflation has been high and expected to remain high on the average in the coming years. If one were to assume Inflation to be at 9%, then let us evaluate the ability of a debt instrument to protect your wealth. A typical bank fixed deposit yields about 9% nowadays. Assuming 30% tax on the interest earned, your post tax return on the Fixed Deposit is 6.3%. As a result, your wealth loses 2.7% each year. This essentially mean, if you start with Rs 100, at the end of a 10 year period the purchasing power of your wealth will be Rs 79.8. If you believe inflation is here to stay, then investing in fixed deposits is a high risk investment as it is ‘Certain’ that you will lose the purchasing power of your wealth.

On the other hand, equities have historically delivered an annualised return of almost 17%. On an average, equities have a proven ability to protect your capital against inflation and provide a real rate of return. There are some periods where this return has been lower and other periods when it is higher. But, at least equities have an ‘Expected’ probability of delivering returns ahead of inflation.

Equity markets have been flat for almost 5 years and based on its historical record, it should catch up with its averages sometime. We do agree that the world at large is not looking great now. On the other hand, there have been several such periods in the past and the global economy has always survived through such crises. It is periods like this that provides a great opportunity for equity investors. We continue to believe it is an exciting time to invest in equities.