Significant benefits of investing in equities that you shouldn’t ignore

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March 16, 2021 11:01 AM

Equity is one of the few asset classes that offers you a great opportunity to maximise returns provided you are ready to take the required amount of risk.

With the right stock selection and correct strategy, you can earn high-returns by investing in equities in the coming years.

When investing, if you take more risk than you can afford to, you may incur losses, and if you’re excessively risk-averse, the returns on your investments might not be sufficient to meet your financial goals in time. So, it’s crucial to take a balanced amount of risk while investing. Depending on your age and return expectation, taking an optimal level of risk can help you achieve your financial goals at the right time. Now, equity is one of the few asset classes that offers you a great opportunity to maximise returns provided you are ready to take the required amount of risk which may range from moderate to high in most cases.

There are various ways of investing in equities. For example, you can invest through mutual funds, tax-saving equity linked savings schemes (ELSS), the National Pension System (NPS), or invest directly in stocks. The fact that millions of new demat accounts have been opened in FY2020-21 underlines the growing interest of investors towards equity investments. I’ve discussed a few significant benefits of doing so intelligently, especially this year.

To earn high returns

There are two types of returns you get from investing in shares — capital appreciation and dividend income. Investing in shares with fundamentally strong financials can help you earn a regular dividend income. Equities also have a high returns-generating potential to give you a high capital appreciation in the long term. For example, the Sensex has offered CAGR of 15.71%, 11% and 10.96% in the last 5, 10 and 15 years, respectively, while the provident fund interest rates, which are usually the highest among government-backed debt savings schemes, have remained in the range of 8.25%-9.5% p.a. in the last 15 years.

India has envisioned to become a $5-trillion economy by the year 2024-25. The equity market is expected to make a significant contribution to achieve such a big task. Currently, the equity market is touching all-time highs despite the Covid-19 setbacks suffered in 2020. The stock market could give phenomenal returns in 2021 and beyond. With the right stock selection and correct strategy, you can earn high-returns by investing in equities in the coming years.

To beat inflation and maximise wealth creation

Do you know inflation is one of the main constraints towards wealth-creation in the long-term? If you earn a lower investment return than the inflation rate during the investment period, it will result in wealth erosion. You will not want that to happen, right? For example, banks are currently offering an interest of around 5.5% p.a. on FDs for a period of 3 to 5 years. If you fall in the highest tax bracket, your net return (post-tax) will fall to around 3.85% p.a. It means if the inflation during the invested period is 4% then instead of wealth creation, your wealth will erode by 0.15% every year. Investing in equities can allow you to earn a high return that can beat inflation by a great margin and help you maximise wealth creation in the long term. If you look at the past, stock indexes have overwhelmingly outperformed return on debt and most other investments in the long term.

Attractive tax advantage over other asset classes

Investing in equities also offers tax benefits. Long-term capital gains (LTCG) up to Rs 1 lakh from equity investments are tax-exempt, whereas LTCG of over and above Rs 1 lakh is taxed at a 10% rate. Short-term capital gains (STCG) from equity investments are taxed at a 15% rate. Return on debt or gold investments invites higher tax obligations than equities. If you are looking for an investment that is more tax-efficient than gold, debt, etc., you should explore investment opportunities in equities.

You can get a loan against shares and equity mutual funds

Many people are recovering from a financial setback after the Covid-19 pandemic. So, investment instruments need to be liquid to meet all kind of financial emergencies. If you invest in shares or equity mutual funds, you can sell them on any trading days and get the money in your bank account within a few days. You also have another option if you don’t want to liquidate your investments. You can pledge your investment in qualified shares or equity mutual funds with the bank to get a loan against them. You can repay the loan in the future to remove the pledge. Usually, banks allow loans up to 50% of the eligible shares/equity mutual funds’ value.

Things to keep in mind when you invest in equities

It’s very important to understand that you must avoid investing your entire corpus into equities. Depending on your age, risk appetite, return expectation, and investment tenure, you may decide how much to invest in equities. You must diversify your investments across different asset classes and into different shares and equity funds to reduce the volatility risk. You’ll also be well-advised to avoid stock tips or recommendations from unregistered equity advisors and invest in equities through SIPs or in a staggered manner to reduce the market risk.

If you’re inexperienced and looking to invest in direct equities, you should also consider educating yourself first by reading investment-related books and articles or doing an online course. The bottom line being, equities undoubtedly have the highest returns-generating potential; however, you must invest in them intelligently – guided by facts and not emotions– to effectively minimise the risks and earn the desired returns.

(The writer is CEO, BankBazaar.com)

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