Simple & safe way to invest in equity

India Infoline News Service | Mumbai |

Treat equity investment as a long term one for 10-15 years like your insurance or PPF
(or at least as your 5-yr NSC) and you will most probably end up with very good
returns

   
      0
A+ a-

Open FREE Demat Account and get access to indepth research on 500 stocks
Name

Mobile

Submit

 T&C apply.

Investing in equity is one of the few ways of making big money—sometimes very big money.
However, it comes with the risk of losing money—sometimes the entire amount. Therefore,
despite the high potential, investment in equity is negligible when compared to the bank
deposits / post-office schemes. The fear of loss is simply too overwhelming.

That apart, investing in equity is not easy.

 You have to have sufficient knowledge to understand the economy, markets and
annual reports.
 You have to spend considerable time analyzing balance sheets, profit & loss accounts,
cash flow statements.
 You need to monitor your portfolio almost on a daily basis.
 You may not have sufficient corpus to build a meaningfully diversified portfolio.
 Due to sharp market volatilities you are never sure when to buy / sell.
 All the news flow, hype and conflicting opinions in the media only add to the
confusion.
 You cannot depend on the tips as, more often than not, they are a trick to fool you.
 Time and again the scams in the market have eroded the investor confidence.
 You have to open a demat a/c.
Given all this, it is not difficult to understand why majority of investors prefer the simplicity &
safety of bank / post-office deposits. But there is a way out. Yes, there is a simple and safe
way to invest in equity. You can invest in equity without the abovementioned problems. You
 can invest in equity with practically zero possibility of losing your entire capital. The answer
is—SIP in index funds.

Know more about SIP in index funds

 When you buy index funds (Nifty or Sensex), you are investing in top 30 / 50
companies.
 No need for you to analyze balance sheets, profit & loss accounts, cash flow
statements of these top companies. They are anyway tracked by FIIs, mutual funds & other
institutional investors.
 Corporate governance in these big companies usually good.
 Due to large equity base and diverse ownership, chances of share price manipulation
are low.
 Scams usually happen in small or medium sized companies. Even if there is a scam in
a large company (e.g. Satyam), it may be a one-off case. Moreover it will be thrown out of
the index. Thus its impact, over time, will be negligible.
 Index funds do not require a fund manager.
 All index funds are more or less same. So no problem of how to choose the best
funds.
 Fund management costs of index funds are amongst the lowest.
 Since you are investing through an SIP, you don’t have to bother about when to buy.
 No need to monitor it. When old companies go out and new companies enter the
index, the fund will take care of it.
 You can diversify across the entire top-end of the market even with Rs. 500 / Rs. 1,000
 No need of a demat a/c.
So investing in index funds is as simple as making a bank FD / RD. Now, let us look at the
safety aspect.

I did some number crunching on the Nifty from its beginning in mid-1990s till 1 st week of
March 2012 i.e. a period of almost 22 years. I worked out the following
 What were the returns after 5 years, if a person did SIP of Rs. 1,000 for 5 years (60
months) starting on any given day (around 4,000 data points).
 What were the returns after 10 years, if a person did SIP of Rs. 1,000 for 10 years (120
months) starting on any given day (around 2,800 data points).
Here is what I observed 

No. of SIP per month Max. Return Returns Min. Return Returns Avg. Return Returns
months

60 Rs. 1,000 Rs.1,74,000 37.14% Rs. 45,450 -11.40% Rs. 84,400 12.84%

120 Rs.1,000 Rs. 5,08,000 24.29% Rs.1,03,450 -3.01% Rs.2,50,400 13.25%

As you can see, in the worst case the loss was 11.4% in a five-year SIP, and it was 3% for a
10-year SIP.
The average returns of around 13% were far better than returns on FDs (moreover these
returns are tax-free whereas your FDs would be taxable based on your tax slab). 
 Treat equity investment as a long term one for 10-15 years like your insurance or PPF (or at
least as your 5-year National Savings Certificates) and you will most probably end up with
very good returns. 
The writer is the promoter of  The Wealth Architects.
Tags insurance PPF
 
Advertisements
 Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ... Know more
 Now Save Rs.3150 on your Demat Account ... Click here
 Now get IIFL Personal Loan in just 8* hours... APPLY NOW!
 Get the most detailed  result analysis on the web - Real Fast!
 Actionable & Award-Winning  Research  on 500 Listed Indian Companies.