The main benefit of investing in equity is the prospect of increasing the value of the principal amount invested. If you want growth over the long term, you have to invest in equity. According to experts, it is the only asset class that has a consistent proven track record of doing so.
Prateek Mehta, Chief Business Officer, Scripbox, says “If you want to save for your retirement or your child’s future college education, equity is the only meaningful investment option. Your portfolio should reflect what you want to achieve rather than merely how much returns and profits you can generate.”
Additionally, investments in equity funds offer investors a diversified investment option usually for a minimum initial investment amount. Having a diversified portfolio means investing in multiple asset classes like equity, debt, gold, etc.
Vinit Pagaria, Head of Research and Analytics, StockEdge says “As the number of less correlated investments in the portfolio increases, the overall portfolio risk reduces. The diversification is also necessary within the equity portfolio. Not all money can be invested in just 1 or 2 stocks. An ideal equity portfolio should be diversified at least across 10-20 stocks.”
Here are the things to keep in mind while investing in equity:
Equity as an asset class is meant for the long-term financial goals of an investor. Long-term means investors should have an investment horizon of 5 years and above. If you put in your money for the short term, the value of your investments can fluctuate a lot in the short-term for months or even a couple of years.
Investing in equity makes sense only for long term objectives such as for creating a retirement fund, creating a college fund, long term wealth creation where beating inflation is the key requirement. Mehta, of Scripbox, says “Investing in equity is a complex exercise as the number of factors that influence such an investment is very high. Hence, choosing a good portfolio of equity mutual funds is the wiser choice. You can pretty much outsource the decision of choosing the best funds to a good advisor and the best companies to invest in, to the fund manager(s).”
Where should you invest?
If you are planning to invest in short-term liquid assets are your best bets. Liquid assets should be looked-for short-term parking of surplus money. Bond funds, on the other hand, may carry interest rate risk and credit risk. The price risk for bond funds is typically much lower in comparison to equities.
How long should you stay invested in equity?
The time period for staying invested in equity depends on return expectations and risk-taking appetite of an investor. While short-term investments could be for periods less than a year while long-term investments can be held for decades. Pagaria adds, “Equity, as an asset class provides investors the potential for higher returns, albeit at a higher risk.”
How should you choose between various asset classes?
An asset class is a set of investment options that behave in a similar way and are exposed to roughly similar risks. As a corollary, they provide a certain range of growth depending on the risk.
Within asset classes, there are sub-asset classes that behave differently depending on the risks and particular factors they are exposed to. Depending on the time frame and ability as well as the needs of investors, each asset class is apt for different goals. Some are quite stable but don’t grow as much and make sense for short term needs. But others that are volatile in the short term, such as equity, are good for long term objectives.
Mehta, of Scripbox, says “Align the asset class to your objective and time frame and be realistic about your ability. Investing in equity for the short term is a risky exercise. Choosing fixed income-based instruments for such objectives makes much more sense.” Note that, you are seeking consistent returns for your financial goals, try not to chase the mythical ‘best’ returns.