First-time investors often face a dilemma about the kind of assets to add to their portfolios. Many such investors favor safer investment options that guarantee returns and assign low priority to equity and equity-oriented investments. Limited knowledge about the markets and the family conditioning to opt for traditional investment avenues are the primary reasons for the reluctance.
However, with the rising cost of living, one cannot simply rely on fixed-income instruments. To fulfill their financial aspirations and goals, first-time investors must focus on investing to generate inflation-beating returns for long-term wealth creation. Equity is the only asset class that offers investors an opportunity to earn inflation-beating returns and build a financially secure future.
Investing in equities
Equity is an ideal investment for beginner investors. When you invest in the stocks of a company, you own a stake in its business, becoming a partner in its growth. With some research, you can make the right equity investment choices that help you.
Safer investment options offer limited returns. But to achieve some of the big-ticket life goals in life, like sending your children off to the best colleges or building a sizable retirement fund, you need to pursue the wealth creation strategy. Although they carry some risk, the equity markets have a higher potential to generate inflation-beating returns over the long term.
Stock markets have outperformed inflation in the long run. With inflation at around 7 per cent, a long-term at around 16 per cent return on equities ensures that you can maintain your lifestyle unperturbed by inflation.
As the Indian economy is poised to grow, businesses will see growth too, thereby making owing a stake in them the best investment decision. By selecting the right stocks and remaining invested in the markets over the long term, first-time investors can tide over market volatility and short-term fluctuations.
Benefits of Compounding
Compounding is the interest that you receive on interest. While there is no fixed interest on equity investments, most companies deploy their profits back into their business, leading to better returns on investments in the long term.
If you take the mutual fund route, you can opt growth option, where the fund managers reinvest the profits in the underlying scheme. With the growth in operations of the invested business/fund, investors reap the benefits of compounding on the principal amount invested.
Another reason to include equity investments in your portfolio is that stocks, like many other safer investments, can also help you earn some extra income via dividends which is a share of profits that a company pays out to its shareholders. You can choose specific dividend-paying stocks for your portfolio to enjoy this benefit.
Equity investments are also highly liquid. With millions of trades occurring on the stock exchanges daily, it is relatively easy to liquidate your holdings if you need to. This liquidity gives first-time investors an easy out if they need to sell their stocks for emergency requirements.
Other things to keep in mind
If you are a first-time investor keen on tapping into the benefits outlined above, all you need is a demat account to get started with your equity investments. However, there are some crucial points that first-time investors should keep in mind before investing in equity. Here are some such practical tips.
Role of adequate research
Numerous stock tips are doing the rounds on social media and instant messaging apps. With misleading promises, they make investing in stocks sound tempting. While it can be enticing to follow their recommendations to make quick money, you could be making a costly mistake.
Markets work for you only when you research and make investment decisions based on your goals instead of hearsay. Invest for the long term in fundamentally strong companies and stay put to tide over short-term market volatility.
Invest as per your risk appetite
It is crucial to assess your risk appetite before making an investment decision. If your risk profile leans more towards the conservative side, you can choose blue-chip or dividend stocks. On the other hand, if you can afford to take on risks, you may have room for mid-cap stocks in your portfolio.
Adopt a long-term approach
For beginners, timing the market can be challenging. A long-term approach eliminates the need to time the equity market. Instead, it increases your time in the market and helps you tide over market volatility. Plus, by remaining invested across different market cycles, you reduce your overall investment risk.
You don’t need a lump sum amount to invest in equity
Contrary to the popular misconception, you don’t need to save up a sizable amount to enter the markets. Systematic Investment Plans (SIPs) allow you to start your equity investment journey with as little as Rs 500.
As a first-time investor, you may not be aware of many areas of finance in general and the stock market in particular. Fortunately, expert help is now just a call away. So, don’t hesitate to reach out to a financial planner or an investment manager if you need to.
The reasons outlined above, coupled with the essential tips for equity investments, maybe just the push you need as a first-time investor to leap into the markets. Remember that equity investing, when done right, can prove to be a game-changer for your financial plan. With the right guidance and investment decisions, you can achieve all your financial goals without any hassle.