After spending a few days deliberating over the safe investment options and how that can be utilised for maintaining a good standard of living and meeting balance liabilities in the retired life, Rajesh and AK seemed more sure about where to park the wealth they had accumulated over the years.
Over the course of their discussions, Pranav had also mentioned about how he also took to investing in equity over the years and how it has helped him tremendously. This line, mentioned in passing by Pranav, had remained with Rajesh. He had been thinking about broaching the subject for a few days, but the nuances of safe investments kept the trio occupied otherwise.
Once the dust around safe investments settled, he broached the issue now.
“Have been thinking of what Pranav had told about equity investing and how it has helped him. Keen to discuss this also,” he dropped the text in their chat group.
The next morning, Pranav was expecting a barrage of questions, and came mentally prepared. “I don’t think we will be able to discuss equity in a single sitting, especially if we decide to play Golf before the class,” he quipped. The trio had by now made personal finance discussion a top priority, and didn’t mind playing just half the course for a day or two in a row.
The ask was simple. “Tell us more about equity and how it has helped you. Can we also not take some benefit out of it?” Rajesh started.
“Just to be clear, I was referring to equity investment through mutual funds, and not directly. Direct stock investing is a totally different ball game and I would not advise you to venture into it at all at this juncture – it would not only be too risky but requires a tremendous amount of research capability and knowledge which will take a long time to acquire. On the other hand, mutual funds will give you similar results if done right. Nonetheless, I will try to answer your concerns,” Pranav said.
He then went on to explain how many people avoid equity investing based only on some myths and hearsay, which is a big mistake. “People make statements like – it is gambling, that only the rich can afford to invest in stocks, only those well-versed with the complex technicalities of the market can invest in equities, or that investing in equity is hugely risky. All of these are exaggerations while the truth is something entirely different,” he said.
On risks, he said, “We have discussed in the past that even debt products have their own risks. Equity also has risks, but it can be a game changer for your portfolio if managed effectively.” He went on to elaborate how investing in equity makes the investor a shareholder in a company, which in turn means owning a part, though tiny, of the business.
You can take pretty informed decisions in equity investing, and that rules out the gambling allegation. Similarly, you can invest as low as Rs 500 per month or Rs 5000 at one go in equity instruments, that too with just a few clicks or taps on your phone. This rules out the other allegation of it being a rich man’s game.
“To put it simply, you can use equity mutual funds to invest in equity in a very simple way. This would mean that a professional fund manager would do all the investing chores for you. He will select the companies and how much to invest in each from the fund. He will also take a call on till when to remain invested in a particular stock and when to exit it. All of this and much more for just a tiny fund management fee of 1 – 1½ % per year,” he explained.
Investing in equity mutual funds means that you become a tiny shareholder in several companies that are present in the investment basket of your mutual fund schemes. You can use small investments as a lump-sum or periodic investments – big or small – in the form of systematic investment plans (SIPs) to nurture your portfolio.
All of this while getting the flexibility to invest in, or exit from your investments at any point of time as per your own needs. Majority of equity mutual funds have no lock-in period at all.
“But I have heard about a 3-year lock-in for mutual funds,” AK said.
“That is only for tax-saving mutual funds called Equity Linked Savings Schemes (ELSS). But a fun fact – this is the lowest lock-in period for any tax-saving instrument in the entire basket of section 80C of the Income Tax Act. Other options like FDs, PPF, investment-based-insurance policies, etc have a minimum of 5-year lock-ins, going up to 15 years!” Pranav said.
“What about the returns? For the past so many days we have been discussing assured returns and safety,” AK said.
Pranav then elaborated on the fact that equity investments have their risks, that are higher than most debt instruments. But since higher risk implies possibility of higher returns, it is something you should definitely look at. “Look at it this way. The core principle of investing in equity is that you should remain invested for a long-term, which means for at least a few years. Hence, I did not bring it up at first. If you can remain invested in equity instruments for, say, 5-10 years, then by all means you can go ahead with them,” he explained, adding that from past data, it can be easily seen that equity returns are much superior over longer periods, like over 7 years or more, when compared to other asset categories.
Pranav talked about how his allocation to equity has come down from 70%, when he started his financial plan, to around 35% now, close to retirement. “Now I want to reduce my risks in investments and in general on my accumulated corpus. Hence, I have reduced my equity component,” he said.
“So, should we ignore it altogether?” asked Rajesh.
“Not at all. Ignoring it would also imply that you are willingly giving up a very important investment avenue which is powerful and easy to execute through the mutual fund route”.
“In case you are still sceptical, start a small Systematic Investment Plan (SIP) of a few thousands per month and experience how it works. This will give you some understanding and confidence over the next few months. While, I would caution you to not invest more than 30% of your retirement corpus in equity, it really depends on individual risk appetite and future financial requirements coming up. Also remember that the mutual fund route also gives you the flexibility of Systematic Withdrawal Plan (SWP) which is a tax-efficient, flexible and a very smart way to get a regular income in case you require it,” Pranav said.
This treatise on equity again had AK’s and Rajesh’s grey cells buzzing. ‘Back to the drawing boards once again’ is what their brain seemed to be conveying through their expressions. They were not aware that the next discussion was going to demolish a lot of their myths about their favourite metal…..
- Several myths surround equity (or stock market) investments. The most common perception of it being a gamble or not suitable for retirees is something which needs to be debunked.
- Equity investments should be a necessary part of everybody’s portfolio – the percentage quantum should vary as per own risk attitude and aptitude, and financial goals coming up. But to avoid it altogether would tantamount to missing an important ‘force multiplier’ in own money management!
- While direct equity investing seems very lucrative with all sorts of ‘tips’ flying around especially on the 24X7 financial TV channels, for most people mutual funds are the best way to go about.
- Equity investments should be considered for long-term only. Short term equity investments can go either way and it is more of a luck-game rather than serious investing.