One of the biggest reasons why people seem to invest in stocks is the possibility of making quick money and not having to work ever again. While that does sound enticing, especially when you’re old, you need to be smart about where you invest your money. With that said, there are typically two ways to make money—by working, or by making your money work for you.
If you keep your cash stashed away instead of investing it, your money isn’t really doing anything useful. This means that if you don’t invest wisely, you’ll never have more money than the actual amount that you have saved. However, if you choose to invest your money, then you’re getting your money to create more money in the form of interest. Another way to generate money is to let your stocks grow in value and then buy and sell them at a profit.
How you choose to invest your money doesn’t matter much as long as you do invest. Whether it’s in stocks, bonds, property, business, gold, or anything else that increases in value, the underlying principle is the same; to funnel money into investments that will earn sufficient money for the future. No matter what your end goal in investing is—saving for your children’s education, a world tour when you’re 60, or buying a house in the countryside—investing should be second nature to you if you’re looking forward to a peaceful retirement.
What you can do
While you don’t need to tune into CNBC for a stock quote every waking minute, investing does need a certain amount of knowledge, planning and foresight. If you’re a part of the Public Provident Fund scheme offered by the Indian Government, you’ve already taken part in India’s tried and tested way of getting long-term returns.
However, PPFs and Fixed Deposit offer lower returns when compared to stocks. That is why, to many, stocks are by far the best way to boost your retirement amount. Here’s why you should consider investing in equity:
1. Unparalleled Growth
It’s true that the market has seen its fair share of ups and downs, especially in recent years, but that shouldn’t deter you from investing in equity. For perspective, you stand to make significantly more money by investing in stocks than you would by investing in bonds or commodities over a period of 10 years. While risk is an undeniable part of investing in stocks, if you know when to get out, you stand to add a sizable chunk to your fortune.
2. Easier Allocation of Money
Volatility has always been an issue with the stock market. However, the key to overcoming an unstable market is to make sure your financial portfolio is as diverse as possible. You do not want to put all your eggs in one basket and allocate all your money to stocks. Instead, your trusted savings account, fixed deposit, and other low return but safe debt investments can offset your riskier investments that promise better returns.
3. Greater Long-Term Returns
The best part about investing in stocks is that it pays off in the long run. When you’re close to retiring, safe investments make sense. However, if you’re at the start of your career, you can take a few risks and ride the ups and downs of the market to ensure the maximum growth of your money.
To give you an idea of why investing in equity is a wise choice, consider the following situation: 30 years ago if you’d invested INR 1 lakh in UTI Mastershare, you’d have INR 71 lakhs today. In the last 30 years, India’s mutual fund and equity schemes have offered staggering returns. While safe options exist for investment opportunities, many retail investors continue to baulk at the idea of investing in the stock market.
Staying Out Might Be Risky
Equity investments are synonymous with short-term risk. However, avoiding equity investments may be even riskier from a long-term perspective. This is partly because the Indian equity market has offered markedly better returns when compared to other asset classes, and is expected to continue doing so in the future as well. Moreover, when it comes to the matter of tax-saving, equity linked saving schemes, or ELSS, are great tax planning instruments.
Why People Aren’t Investing in Equity
Despite constant efforts by the industry, regulatory bodies, and the media, financial literacy is at a low, even amongst well-educated professionals. For many people across India, savings refer solely to bank deposits, life insurance policies and other debt instruments. Many people have never even thought of equity investments as viable investment opportunities. The problem stems from a simple factor—people are simply unwilling to invest in something that they don’t fully comprehend. A simple effort into educating and creating awareness can help many first-time investors make the leap to equity—and better savings.
What You Need to Know
Most people think of fixed deposits when they think of long-term savings. However, what most investors do not realise is that the negative real returns of an FD (once you take inflation and tax into account) are particularly pronounced for long-term goals such as planning for retirement. Simply put, FDs generate a negative real return which means that as an investor, you’ll miss out on the compounding effect. More worryingly, if you’re only banking on your FD to get you through retirement, you might run out of funds halfway through your retired life.
What You Should Do
When it comes to investing in equities, always approach the market with the intent of going long-term. Countless equity traders have a problem with investing for the long-term, and some do not even appreciate the benefit of long-term investments. Equity investments, when made smartly and patiently, can earn you seemingly endless rewards that can help set you up for the rest of your life. If you’re a first-time investor, then the best way to start is to invest with the help of a financial advisor, someone you can trust with your money. A professional can help you manage your stocks and appropriately diversify your investments to ensure a safe and profitable portfolio.