Investing in Equities: Risk or Reward?

By Cannon Doyle | July 23, 2015

 equity 3 - market trends

Broccoli soup or Grilled Chicken? Salad or Burgers? You probably did not pick the Broccoli soup but we all know that it’s healthy.
When it comes to investments, people have their own preferences with gold, land and FDs, but not many pick equities.

Equities are considered risky and some even consider them akin to gambling. Various scams and a volatile global economy have done quite a bit to damage the reputation of equities in India.

However, all said and done, equities do give good returns over the long term.

Equity v/s gold

Indians have special sentimental attachment towards gold. A bride’s worth is often measured by the number of grams (or rather kgs?) of gold she gets from her maternal home. This gold is usually never sold and remains as a dead investment in some bank locker. The gold run that has caught the fancy of many has given a return of 14.13% over the past 10 years.

This figure may look attractive to many and is comparable to equities. But does it take into account many other factors, like transaction costs, cost involved in keeping the gold secure, commission paid to the jeweler, liquidity and others?

When you factor in all these, the actual returns would come down. But if you want to benefit from the movement of gold prices, go in for gold ETFs rather than physical gold.

Equity does not come with all those costs.

Equity v/s real estate

Sadly, land is the only asset class that is limited in supply.  Economic developments since liberalization in 1991 have driven real estate prices through the roof. We have seen the cattle rearing grounds of Gurgaon turn into modern glitzy places. Astronomical returns of 100% are also possible in certain cases.

However, real estate investment in India is not everyone’s cup of tea. Remember the movie Khosla ka Ghosla, where land encroachment led to a con artist conned?

Right from legal title of the property, transaction costs, registration, stamp duty and to top it off illiquidity, maintenance, finding a tenant etc, real estate comes in with a baggage of its own. Each time you make gains on your real estate investment, you are liable to pay capital gains, unless you invest in specified investments. Comparing returns from real estate to equity is difficult as there is no standard index for real estate.

However, many financial planners show that long term returns from real estate after taking into account the above mentioned costs stand close to fixed deposit returns.

At least investing in equities does not come with a heavy baggage of worries as real estate.

Equity v/s fixed deposits

Fixed deposits (FD) is a class of asset that rings the bell of safety in the minds of investors. Traditionally, this was the favored means of investment to meet financial goals. But just as the risk involved is less, so is the return. Currently, the highest rate paid on FDs is 9.00%.

Again, this figure is pre-tax and is not adjusted for inflation. Investments in fixed deposits do not qualify for deduction under Sec 80C of Income Tax, barring the ones for 5 years tenure, whereas investments in Equity Linked Savings Scheme do.

On the other hand, any long term gain made on equities is not taxed.

Investing in equities

Each asset class has its own pros and cons which investors should evaluate before investing. Equities are known to outperform (14-15% in a period of 10 years) other classes of assets over the long run.

Here’s a sum up of what we discussed above:

  Equity Gold Real estate Fixed Deposit
Transaction costs Low High High Very low
Income tax benefit Yes No Yes (Interest & Principal payment) Only for 5 yr FD, interest taxable
Capital gains tax Not on long term gains Yes Yes No
Risk High Moderate High Low
Long term returns(not guaranteed) 14 -15% 14% Difficult to estimate 7        -9%

 

Five golden rules for equity investors:

  1. Be a disciplined and an informed investor.
  2. Avoid hearsay and speculations.
  3. Choose the mutual fund route to be safe.
  4. Maintain consistency in investing.
  5. Do not ignore the fact that returns from equities can go into the negative territory when considered short time.

Just like you need a balanced diet that even includes burgers from time to time, your investment portfolio should have a diligent mix of various classes of assets suited to your risk, profile and goals. Maybe Broccoli soup isn’t such a bad idea, right? Right?

 

YOU MAY ALSO WANT TO: Figure out if your investment salad contains all the right elements – SIP Calculator

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

Leave a Reply

Your email address will not be published.