Author Box
Articles Categories
All Categories
Articles Resources

Simple And Safe Way To Invest In Equities

March 14, 2012 | Comments: 0 | Views: 121

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 and 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 volatility you are never sure when to buy/sell

- All the news flow, hype and conflicting opinions in the media only adds 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 the investors prefer the Simplicity and Safety of bank/post-office deposits.

But there is a way out. Yes, there is a simple and safe way to invest in equity.

Yes, you can invest in equity without the above-mentioned problems. Yes, you can invest in equity with practically zero possibility of losing your entire capital. The answer is - 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 and loss accounts, cash flow statements of these top companies. They are anyway tracked by FIIs, MFs and other Institutional investors

- Corporate governance in these big companies is 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 any large company, 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 doing 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.1000

- 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 birth in mid 1990s till 1st week of Mar 2012 i.e. a period of almost 21-22 years. I worked out the following

a) What were the returns after 5 years, if a person did SIP of Rs.1000 for 5 years (60 months) starting on any given day (around 4000 data points)

b) What were the returns after 10 years, if a person did SIP of Rs.1000 for 10 years (120 months) starting on any given day (around 2800 data points)

Here is what I observed

5-year SIP

Amount invested: Rs.60,000

Max. Value / Return: Rs.174,000 / 37.14%

Min. Value / Return: Rs.45,450 (-11.40%)

Avg. Value / Return: Rs 84,400 (12.84%)

% of negative returns: 20%

10-year SIP

Amount invested: Rs.120,000

Max. Value / Return: Rs.508,000 / 24.29%

Min. Value / Return: Rs.103,450 (-3.01%)

Avg. Value / Return: Rs 250,400 (13.25%)

% of negative returns: 7.8%

Therefore, as you can see,

- Even in the worst case the loss was just 11.4% in a 5-year SIP. So don't worry, you won't lose your entire capital.

- Probability of making a loss was less than 8% on a 10-year horizon and that too just 3% in the worst case.

- Even 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-yr NSC) and you will most probably end up with very good returns

By the way, suppose you started the SIPs during the euphoria of Jan 2008 when the Nifty was at the then all time high of 6288; but thereafter the 4 years have been the most tumultuous and uncertain in the history of the markets. Despite this and the markets trading nearly 1000 points down at 5220, you would still be in profits today [5.38%].

So that's it - a simple and safe way to enjoy the fruits of equity - and smart too.

Sanjay Matai is the promoter of The Wealth Architects ( ), a personal finance portal that focuses on assisting individuals to plan their finances. He is also engaged in spreading financial literacy through numerous articles/columns and his books viz. "Millionaires don't eat cakes...they make them", "10/10 Now control your money...Perfectly", "Plan for Prosperity" and "The Money Gyaan".

Source: EzineArticles
Was this Helpful ?

Rate this Article

Article Tags:

Index Funds


Systamtic Investment

Forex dealing is dealing in currency trading and basically includes dealing in foreign exchange while the stock market dealing is the dealing of stock in a standard market market. The two types of

By: Anil Mali l Investing > Stocks l October 25, 2012 lViews: 243

Investments in silver metal can be done by several ways. The article talks about the best ways of silver investments. Silver, the precious metal has always attracted investors for several reasons.

By: Kyles Humphrey l Investing > Gold Silver l August 17, 2012 lViews: 305

The article offers reasonable reasons for high oil prices. Crude is indispensable and it is a great source of energy. The prices on oil keep on altering, sometimes it is too high and sometimes it

By: Kyles Humphrey l Investing > Stocks l August 17, 2012 lViews: 286

Many investors are unaware of new tax that will be levied as part of the Supreme Court’s decision to uphold President Obama’s health care reform. The investment tax, as it is being referenced,

By: Ben Esget l Investing > Retirement Planning l July 17, 2012 lViews: 405

A few months ago, I was at Starbucks talking to someone about stocks and bonds, he and his wife had worked hard and were worried about the stock market. They wanted something much less risky. He

By: Lance Winslow l Investing > Stocks l July 11, 2012 lViews: 434

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

By: Lawrence Tepper l Investing > Retirement Planning l July 10, 2012 lViews: 240

According to financial experts, mutual funds shouldn't be selected merely on the basis of past performance and fundamental analysis of indices. First of all, you need to understand that investments

By: Shabbir Bhimanil Investing > Mutual Fundsl June 16, 2012 lViews: 189

Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities. There is no such accurate definition of mutual funds, however the

By: Vaibhav Bhadangel Investing > Mutual Fundsl June 06, 2012 lViews: 223

Mutual fund investments can give investors high returns when they succeed in choosing the best mutual funds. The best mutual funds are those that facilitate diversified and multiple stocks purchase,

By: Wayne A Gormanl Investing > Mutual Fundsl May 30, 2012 lViews: 213

Past performance isn't a proper indication of future overall performance. A poor-performing fund which had massive deficits in one year shouldn't be considered to do similarly in the subsequent year,

By: Alisia Matthewsl Investing > Mutual Fundsl May 25, 2012 lViews: 192

In case you are wondering if there are risks in investing, the answer is yes. Although investing in a cash ISA involves little risk, there are higher risks involved with regards to stocks and shares

By: Gert Hael Investing > Mutual Fundsl May 22, 2012 lViews: 203

There are many advertisements offering to sell you techniques labelled how to make money the easy way but the experts know that these get rich quick schemes are a sham; just a way to separate any

By: Jack Ritchiesl Investing > Mutual Fundsl May 21, 2012 lViews: 346

Discuss this Article

comments powered by Disqus