Owning a piece of a business means owning a wealth-creating asset. When investors invest in equity or in a mutual fund, they should remember that they are investing in a piece of business or in case of a fund, investing in different businesses carefully selected by experts.
The first task any investor has is to understand the fundamentals of equity. In a nutshell, investors should understand that equity is part of a company. It represents ownership in the company. It is not meant for speculation. So equity is nothing but a piece of business.
Business creates wealth
Owning a piece of a business means owning a wealth-creating asset. When investors invest in equity or in a mutual fund, they should remember that they are investing in a piece of business or in case of a fund, investing in different businesses carefully selected by experts. Traders’ psychology and businessmen’s psychology is different. Business men are risk-takers and willing to be patient with an eye on future returns. Traders, on the other hand, are not willing to be risk-takers and panic during turbulent times in the market. When one is investing in equity, they should adopt part of business psychology. Many investors stop investing in funds or in equity because of losses. Meanwhile, investors who think they are investing in the business look at it differently. They know businesses can incur a loss and are comfortable taking that loss hoping for a turnaround in future. Just as businesses have good years and bad years, your equity fund will also have good years and bad years. But ultimately, just as businesses create far more wealth than salary, rent, and interest; your equity fund can create a lot more wealth for you over time, than other assets that also generate returns.
Equity creates wealth
I always tell investors to think of equity as their second child. Most investors have children. They spend a lot of money on them over a period of 24 years in educating them, providing their needs, making sure they are well settled. I won’t say that invest as much as you are spending on your child but at least invest 60% of what you spend on your child every year in equity funds. After 24 years, your second child will look after you well. History has shown that investing in business or, in this case equity, for long-term has always given good returns. The only thing that we have to change is our mindset. Buying equity means owing part of a business. Have patience and let business flourish. That is when we will realise that equity is nothing but a wealth-creating asset.
By: Dhruv Desai
The writer is director & COO,