India has traditionally been a stock-markets-shy country where people are reluctant to invest in equities. Savings are mostly held in the form of non-financial assets, mainly real estate and gold. According to the latest available RBI statistics, only 5% of the national household savings are held in financial assets; of these bank deposits form the overwhelming majority. What could be the reasons why investors shun equities? One of the important reasons seems to be the lack of knowledge, or rather misunderstanding about stock markets and equities.
Let's look at the top 4 myths and unfold the truth about them.
Stock market investing is akin to gambling
A lot of people believe that there is no rationale about how stock market investments work. This misconception probably stems from the day-to-day movement in stock prices or market indices like Sensex or Nifty 50. However, this is quite far from the truth. Stock price movements are based on information on how the business concerned is doing as well as on news or information that can affect the business' performance in the future.
Negative news can affect the concerned stock prices in the short run, however, if the business is a fundamentally good one with a sound profitability model, competent management and competitive edge, it will recover from negative shocks and be on the growth track again. Take for instance the stock of Nestle, which dropped to Rs 5,100 levels when the Maggi MSG controversy broke out. The management rolled out an effective strategy to deal with the crisis and the losses it incurred. Eventually, Maggi came back stronger as a brand and today Nestle India stock price is in the Rs 9,000 range. Thus, when you invest in equities your income is mainly based on the business' actual performance and on investors' expectation of how the business will do.
Only experts can make money in the share market
A lot of people find investments intimidating because in their reasoning, "if returns depend on technical factors like business' prospects, industry cycle, etc., I shouldn't play the game; I'm no market expert." Well, it's true that knowledge is required to identify good shares and buy/sell them at good prices. Not everyone can dedicate the time and effort to get these things right. But this is why mutual funds exist! Mutual funds have dedicated teams of professionals having the knowledge and expertise to manage investments in capital markets. By investing in mutual funds, you can enjoy the benefit of professional expertise. Not only that, but more benefits like diversification, because every fund's portfolio typically consists of a number of securities, so one investment going bad doesn't affect your wealth too badly.
It takes a lot of money to invest in equities
Another common belief is that stock markets are for the rich and the well-heeled because it takes a lot of money to start with. Nothing can be farther from the truth because you can invest in equities through equity mutual funds, where investments can be made with a minimum amount of Rs 500 per month. Contrast that with the big ticket investments required for real estate, most Indian household assets are concentrated in.
My money is going to be locked-in for a long time
Stock market investments do not come with a lock-in period. You can redeem your mutual fund units whenever you need the money. That said, given the nature of the markets, it is advisable to invest in stock markets only for goals that are a long way off.
This implies first and foremost that you need to think about the goals for which you will invest. Typically, if you're investing for any goal that is less than 5 years away, it is better to avoid equities.
For goals like retirement, children's higher education, marriage which may be due in 10, 15 or 20 years there may be no other asset class that can help to reach the desired corpus better than equities. Ironically, people think it safer to be locked in for 10 or 15 years in FD or PPF at a fixed rate that often gives negative returns in real terms due to inflation, than to stay invested in equities that have the capability to beat inflation in the long term. Equity returns, though fluctuating in the short term, tend to be stable over long periods.
With the top 4 myths on stock market investing debunked, we hope you will gain confidence to choose the right assets for investments, especially for crucial long-term goals like retirement. The first step, like we highlighted, is to gain clarity about the goals themselves.
Investments can then be allocated to equity, fixed income, real estate and gold, according to your goals. Concentrating in one asset class, is a bad approach. Seek the help of a professional financial advisor who can help you lay out a plan for meeting goals, identify suitable investment avenues and coach you through the journey.
Ad-hoc investments based on suggestions from friends or internet advice is akin to gambling and can pose a risk in the path of achieving the financial goals of your family, around which your happiness and wellbeing is ultimately centered.
Amar Pandit is Founder of Happinessfactory.in