1. Should you invest in equity mutual funds? Here are 5 reasons why you should take this route to wealth

Should you invest in equity mutual funds? Here are 5 reasons why you should take this route to wealth

Relative unattractiveness of erstwhile preferred asset classes such as bank deposits, real estate and gold is making investors look at equity investment in a way they have never looked at. And the market is responding to the fresh inflows.

Published: September 12, 2017 5:29 AM
equity mutual funds, mutual funds, invest in equity mutual funds, invest in mutual funds, route to wealth, risks of mutual funds In the short-term, the risk is in volatility of price of the underlying asset, i.e., how much it can rise and fall given a period of time. (Image: Reuters)

– Vinod Sharma

Risk is often the most misunderstood term. In the short-term, the risk is in volatility of price of the underlying asset, i.e., how much it can rise and fall given a period of time. But in the long-run, risk is not volatility but about whether you can maintain the purchasing power of your money. To accumulate wealth and at the same time beat inflation, one needs to invest and not just save. The fascination for safety. Most people usually prefer bank fixed deposits as an investment option due to the fixed return and safety cushion it comes with. Fixed deposits these days would give just 6.8% rate of return. If you are in the 30% tax bracket, net of tax return comes to just 4.6%. The average inflation from January 2014 has been around 5%. So your money is really depreciating in the bank. By taking the safe route, your investments do not reach their true potential.

Take the equity route

However, to truly make wealth you will have to take the equity route to investments. While there is a risk of loss of capital in the shorter run, you can reduce the risks by diversifying your investments and remaining invested for a longer period of time. Long-term capital gains in equities is exempt and short-term capital gains are taxed at 15%, irrespective of your income tax slab rate. More importantly, it is liquid. You can exit at any point of time, if the need for money arises. The BSE Sensex has returned 16.3% CAGR since inception. Many large cap mutual funds have returned more than 20% CAGR in the last 20 years.

Why the time to invest is now

This is the time to start investing in equities because India is at the cusp of high growth where it can truly realise its demographic dividend. There is a shift from the penchant for physical assets to the non-physical ones. The relative unattractiveness of erstwhile preferred asset classes such as bank deposits, real estate and gold is making savers look at equity investment in a way they have never looked at. With the parallel economy money having come to the banking system after demonetisation, it is being channelised into equity and mutual fund investments.

Way to go in mutual funds

Last year, mutual funds assets under management were just 13% of our GDP. The world average is around 53%. A lot of room is there to increase. Just to put things in further perspective, systematic investment plans (SIP) alone in equity mutual funds are averaging Rs 4,600 per month this year. The month of August has seen the highest inflow of Rs 20,000 crore in equity mutual funds. Currently, 35% of the assets under management are in equity. This ratio is expected to rise further to 45% in the next five years. This will take the markets higher.

The markets aren’t expensive

Though the Nifty at 9916 is 51% higher than the 6357 level we were in the month of January 2008, we are much cheaper now, as compared to the GDP. The market cap to GDP ratio today is just 0.87. It was 1.62 in January 2008. In other words, the Nifty can rise 88% from here and still will not be called expensive by that standard. So lift the anchor and set sailing in the equity markets. The journey is going to be both exciting and rewarding.

The author is head, PCG and Capital Market Strategy, HDFC Securities

  1. No Comments.

Go to Top