Is investing in shares a good move?

Indians prefer traditional investments to equity. The focus remains on safer instruments that offer modest returns. Studies show that out of a population of 1.3 billion, less than 2% invest in the stock market. Equity is considered a risky investment, and suitable only for the wealthy. Ignorance is the main reason for avoiding equity investments. Equity instruments have the potential to offer a higher rate of return in the long-run when compared to fixed-income securities. Investing in this asset class is a good move for multiple reasons.

Equities offer higher returns

Retail inflation spiked to 6.93% for July 2020. Inflation erodes the purchasing power of money. Earning a return higher than the rate of inflation can help us achieve long-term financial goals.

Bank Fixed Deposits offer an interest rate of 5%-6% per year. The public provident fund gives 7.1% for the July to September quarter. Equity funds, on the other hand, are capable of delivering much higher returns. Equity funds accumulate a large corpus by pooling money and investing in equity and equity-linked securities. Investing in equity funds is a smart and hassle-free approach as compared to direct equity investment as equity fund managers do a lot of research and pick the right stocks.

To make the most of investing in equity funds, start at an early age, and stay invested for an extended period of time. Investing in equity mutual funds via a systematic investment plan (SIP) is an excellent option for the first time equity investors. It doesn’t require a lump sum or a large capital as you invest a fixed amount at regular intervals.

SIPs combine disciplined savings with regular investing. Through SIPs, you can invest as low as Rs 500 a month. Investing a fixed amount at regular intervals in mutual funds puts money at different price levels, and averages the purchase cost over a long duration.

SIPs are ideal for achieving long-term financial goals such as retirement and children’s education. Reinvesting the returns from the equity fund accumulates more units. Returns are on both, the money invested and the gains, therefore help create wealth over time.

Money managed by professionals

Mutual funds are managed by a fund manager and a team of market researchers. All the investment decisions that would be made will be in line with the objectives of the equity scheme. The fund manager makes smart investment decisions to enhance the return on the investment.

Diversification is used to protect the investment. Diversified equity funds spread investment across sectors and market capitalisation. It reduces potential losses by concentrating the entire investment under one sector. This strategy delivers good returns over a long time.

Equity investment meets financial goals

Equity funds meet different needs across the stages of a life cycle. You can choose between large-cap, mid-cap, and small-cap funds. It is an investment in Companies of various sizes. An index fund imitates a stock market index like the NSE Nifty 50 in composition and performance. The sectoral and thematic funds invest in businesses that operate in a specific industry or theme.

Pick your equity funds based on your financial goals and risk profile. While diversified equity funds work best for retirement, sectoral funds are suitable for aggressive investors. Index funds help you meet goals such as children’s education and marriage. Gold is one of the best performing asset classes in recent times. You may consider investing in gold exchange-traded funds instead of physical gold. Gold ETFs track the domestic gold prices and are traded on stock exchanges. There is no fear of theft or storage charges.

Equity investment saves tax

Equity-linked savings scheme (ELSS) is a tax-saving mutual fund scheme covered under Section 80C of the Income Tax Act, 1961. ELSS investments of up to Rs 1.5 lakh a year qualify for tax deduction under this 80C. It reduces your taxable income and helps you save up to Rs 46,800 in taxes.

ELSS has the shortest lock-in period among all Section 80C investments. The investment can be redeemed after just three years. You may consider investing in ELSS mutual funds through the SIP route if you are worried about the market volatility. As mentioned earlier, SIPs average out the cost of purchasing.

ELSS funds have the potential to offer the best post-tax returns among Section 80C investments. The long-term capital gains (LTCG) of up to Rs 1 lakh a year are made tax-exempt. Any long-term gains that exceed Rs 1 lakh are taxed at 10%. Investing in ELSS is the best way to start equity investing. The mandatory lock-in period of three years will help investors in getting used to volatility in the stock markets.

Equity has a distinct advantage over most investments. It can offer an inflation-beating return, which is crucial to achieving long-term financial goals. First-timers may invest in equity through ELSS via the SIP route. Start equity investments at an early age to get the compounding benefit. Fix the equity allocation with the rule of thumb, 100 minus age. Investing in equity is a good move, only for a more extended period. It is one of the best investments to create wealth.

(The writer is Founder and CEO - ClearTax)