An investment plan may help the investor arrive at a realistic investment objective and the time required to get to the objective. It also assists the investor in determining the risk-return trade-off. This enables the investor to narrow down the investable asset classes, regulating the asset allocation ratio, and drawing up the asset quality framework to adhere to.
The investor must realise that equities market in the short run tend to be highly volatile, but its long-term return potential remains high. Thus, the equities asset class is considered as a viable medium for investors wishing to build a large corpus over the long term. For example, an equity investor who would have invested . 10,000 in January 1980 in the BSE Sensex would have built a corpus of . 16.45 lakh by the end of March this year, at an average CAGR of 17.73% per annum.
Alternatively, had an investor invested just . 1,000 per month (through an SIP, for instance) in the BSE Sensex from January 1980 to March, the effective corpus he/she would have accumulated would be about . 95 lakh.
The point is that equities are a long-term capital builder and deserve as much diligence and patience as any other. An equally important corollary is that investment in equities must start as early as possible to allow for compounding to make a sizeable impact.
Investors must also be mindful that investment in equities occasionally occur either out of personal conviction or out of a systematic setup. If it is the former, then the investor needs to be sharply aware of the emotions driving such conviction. Because, more often than not, it is the emotional inference of fear and/or greed that drives the investor to buy and sell, leading to less than desired outcome. On the other hand, lack of disciplined approach to systematic investments can lead to the temptation of altering the investment pattern, size, and allocation ratio depending on the fluctuations of the market movement. This, too, may lead to sub-optimal return. To address this behavioral tendency, a long-term SIP in equity mutual funds is advised.
The investor must also appreciate that an increasingly integrated world has increased the factors affecting equity assets. Consequently, the risks associated with investments in equities, too, have increased. For example, individual direct investors could be hard pressed to research and identify the underlying business of the company they want to invest in. Moreover, business factors like changes in the input cost of a business, cost of capital, labour and taxation regulation, etc, require in-depth research and specialisation.
An investor without ample resource by way of time, experience, and expertise is advised to seek the mutual funds route to equities investment. Equity-oriented mutual funds are one of the most economical investment products, and provide an investor a proxy route to investment in equities. The core advantage of equity mutual fund is the professional portfolio management service, dedicated research, and hands-on market knowledge offered by the fund management team.
An investor in equities may also want to be watchful about the tax incidence of an investment. While the realised gains arising out of investments held for more than a year attract no tax, the realised gains arising within a year attract tax according to the slab rate. The cost and convenience of equity investment is also an aspect the investor should consider. Demat holding and opening charges, along with the STT and trading charges of the broker, eat into the gains made from direct investment. In mutual funds, while there are no entry charges (and no exit charges either, if the exit is made after a year), an investor has to shoulder the annual recurring charge not exceeding 2.5%. To sum up, new investors in equities must realise that effective investment requires a purpose, a plan, prudent risk appetite, and a reasonable time horizon. Investors must also appreciate that outcomes of direct equities investment can be undesirable in the absence of market knowledge, experience, and expertise. The most convenient and cost-effective route for first-time investors is, therefore, equity-oriented mutual fund.
