Equity (stocks) is one of the principal asset classes. In general, you can think of equity as ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered the owner’s equity because he or she can readily sell the item for cash. Stocks are equity because they represent ownership in a company.
People who invest into equity market without fundamental knowledge of investing claim that ‘stock market as a place where you always lose money’. If this was true then we would not have seen billionaires such as Warren Buffet, Rakesh Jhunjhunwala, Peter Lynch, Thomas Rowe Price, John Templeton etc. They all were patient investors and did not get perturbed by market volatility. Once they identified ‘value’ in a stock and invested, they stick to it as long as there was no fundamental ‘negative’ change even if the particular stock went out-of-favour in the market. In fact, they used volatility as an opportunity to buy more as they believed that sooner or later, the market would recognise the inherent value and the stock would bounce back.
Equity is an important component of one’s portfolio. Equity is a long term investment, ideally the investment horizon should be atleast 7 years. Lot of people claim that investing into an FD is risk-free and equity is too risky. Think about it, with an inflation of more than 8%, an after tax FD return of ~6% isn’t risk free after all.
There are various ways you can get equity exposure in your investment portfolio:
Direct Equity Applyingstock valuation techniques successfully takes years of practice. Do not try to invest directly into equity market unless you have years of experience. Ideally work with a financial advisor and in parallel build your knowledge with respect to selected stocks. There is usually a brokerage charge between 0.25%-0.75% on each transaction.
Mutual funds is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks on your own. Investors can sell their units when they want. Each fund’s investments are chosen and monitored by qualified professionals who use this money to create a portfolio. In return fund manager charges a maximum of 2.5% of the investment amount as fee (in case of equity funds) for managing the funds.
Exchange Traded Funds (ETFs) invest in stocks that comprise an index. The proportion in which it will allocate money may be the same as individual stocks’ weight in the index. For example, a Nifty ETF will invest in 50 stocks comprising the Nifty, most likely in accordance with the weight of individual stocks in the index. Since the selection and weight is decided by the index itself, there is no active manager to manage your investments, hence management fees of ETFs is very low. If you are a first-time investor and not accustomed to the market, we would recommend you to take the passive route, that is, invest in ETFs.
New Pension Scheme (NPS) allows you to choose maximum of 50% allocation to equity. NPS is a very good scheme to save for your retirement especially if the scheme is sponsored by your employer. We will discuss details of NPS in retirement section.
Depending upon your risk profile and your objectives equity allocation may be decided. There are various ways of getting equity exposure as mentioned above. For the first time investor, a combination of ETFs, Mutual funds and NPS may be a preferred option. However, if you are an experienced investor, a combination of direct equity and mutual funds can grow your wealth even better.