When we talk about investing in STOCK MARKET there are multiple reactions. Frankly, whatever the reaction is – one cannot ignore EQUITIES for the simple reason that no other avenue offsets inflation effect, on our net worth, like equity does. Just to simplify this point equities are the best hedge against inflation.
Let’s assume we bought an article at Rs. 100 in the year 1980. The same article costs Rs. 1,830 in 2019. Due to inflation we are paying much higher for the same article. The value of what we buy may not have changed but the same thing costs much more today as compared to few years ago. We often hear our parents or grandparents say about increase in cost of education, real estate etc.
The text book definition for inflation is “quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency.” In short, inflation is when the price of goods/services increase over a period of time leading to decrease in purchasing power of money.
Inflation to some extent is good for economic growth. Let’s imagine, you want to sell a house bought 10 years ago for Rs.25 lakh. As a seller you would definitely like when the price of that house increases over time. You like to see inflation effect. However, had you kept the same money in the bank you would not be able to buy the same house even if you put together all the interest you have earned. Why? The purchasing power of money has gone down. You will have to pay more to buy the same thing.
The above example shows how idle cash is not good enough to cater to our future needs. If someone keeps saving most of his/her earning and keeps it only in savings account it would be difficult to manage the expenses during retirement. The simple interest earned would not offset inflation rate. On the other hand investments in real estate are not very liquid to keep buying and selling several times. A disciplined equity investment over a long period of time can do the magic of beating inflation. Shown below is the annualized return on India’s index Nifty 50. Nifty 50 is India’s index consisting of 50 companies across various sectors. You may check the factsheet on the link below.
SO HOW DO WE SIMPLIFY THIS INFLATION ISSUE ?
For those who have no time and do not want to take big risks the best way to invest in equities is through Systematic Investment Plans (SIP) in exchange traded funds (ETF). Since Nifty is an index i.e. basket consisting 50 listed socks, the collective return on those stocks can be replicated in an ETF. ETF is similar to mutual funds and is more economical in terms of management fee, these are similar to index funds. Since index ETF track an index the administrative costs are less than mutual funds. Mutual funds need fund managers to decide where and when to invest. You can enter and exit from ETF anytime using demat account. These are most simple and liquid investments. There are many ETFs on variety of indices including gold. The return on ETF is similar to the performance of the underlying index itself.
Minor difference between ETF and index funds is that ETFs are priced to market throughout the trading day and are available on demat accounts. Index Funds are priced at close of trading day based on NAV(Net Asset Value) of the underlying securities.
On the other hand, you can select mutual funds. There are hundreds of mutual funds these days. One has to be careful in choosing a fund. It is worth checking the track record of the fund manager, return on fund over years and the size of fund house. This information is available online and is very important to know before putting in hard earned money for years to come. Safeguarding the capital is of utmost importance in any form of investment.
Finally, there is no one better than you to manage your money. Best thing to do is study the markets yourself and invest in your favorite stocks. That way you can make out if the fund manager is not making correct decision or maybe you could perform better than the index. We give decades to learn how to make a living and earn decent money. It makes sense to devote time to learn how money can work for us too. Time and money goes hand in hand. What you focus becomes your priority. If focus is on investment then giving it the time it takes is a priority too. Financial knowledge helps to know if the person managing our wealth is misusing you or leading you in right direction. Just like cooking, driving, swimming – knowledge on investing is basic requirement which cannot be ignored. Happy Learning Happy Investing. EQUITY ROCKS !!!