By Vikash Agarwal
Although Indians are good savers and about Rs 8 lakh crore is saved by Indian households, only 4 per cent of that comes to stocks and mutual funds. Compared to the US, the total corpus invested by Indian in stocks and mutual funds is miniscule. This is because of lack of awareness.
One should aim to invest at least 15-20 per cent of salary income in equity funds through SIP. For example if you are investing through the systematic investment plan (SIP) route in which the average annual return is 15 per cent, and when you retire you want to have a corpus of Rs 5 crore, for this, if you want to invest for 20 years, you need to invest Rs 33,000 per month. However, if you want to invest for 15 years, you need to invest Rs 74,000 per month. So with a gap of five years, your monthly investment doubles. That shows the benefit of starting to invest early and also the power of compounding. Stock markets run on cycles, so it’s important that one starts investing early in life and also invests regularly.
Now if one misses to start investing early, then how should one approach investing; should they invest in the stock market directly or take the mutual fund route? Mutual funds are vehicles to invest in several asset classes. For example if a person wants to invest in midcap stocks and takes the mutual fund route, he will have the help of professional fund managers, will get access to a host of quality stocks, his money will be managed by professionals, and he can also have a well-diversified portfolio. Mutual fund is a very efficient tool wherein you can access different asset classes. Like apart from equities and debt, you can also invest in gold funds. Real estate is also going to come into the mutual fund arena in the near-term. So a common investor, by investing a small amount, can get access to high quality stocks and expect superior return.
When an investor is investing through the SIP route, he is buying mutual fund units at every level of the market that is at low level, medium level and high level. At the end of the day, rupee-cost averaging would be there and also diversification will kick in. While investing in the equity market, one should add the country’s GDP growth rate and the rate of inflation. You will easily get about 15 per cent average annual return in the medium to long term. On the question of what could be ideal financial product to invest in for people who are in the age bracket of 20-30 years and 30-45 years, if one is between 20-30 years old, he should go for maximum equity allocation which could include investments in diversified, midcap and small cap funds. And between 30-45 years, one could go for 70-80 per cent in equity funds and the balance in debt funds, with the latter investment with a horizon of three years or more.
Why people prefer to invest in fixed deposits over equities, and the question of safety versus higher returns, even within the mutual fund fold there are products which give safety, liquidity and also higher returns than FDs. Comparing an FD return of 9 per cent per annum with returns from dynamic bond funds of good fund houses. If 9 per cent is the FD return for three years, if one has invested Rs 1 lakh in FD, he continues to earn 9 per cent year after year. Compared to this, in dynamic bond funds, he could earn about 10-11 per cent annum, plus the taxation benefits. So the total extra return from mutual funds over the three year period would be about 12-13 per cent more than the FD returns.
In this case, the thumb rule of investing, which stipulates the percentage of investments in equities should be 100 minus your age, should be followed rigidly. There is Jacob’s theory of financial management which says that 15-45 age bracket is the accumulation stage when one has to take risks and invest in equities. Then the 45-55 age bracket is the reaping stage where once should go for a balanced investment approach with debt and equity. And then the 55-60 age bracket is the harvesting stage when one should choose between instruments where the equity exposure is 15-20 per cent and the balance in debt. Accordingly one should plan one’s finances and may engage a financial planner.
The ‘100 minus your age’ rule varies from person to person and may not be followed rigidly. This is because equity investments also depend on several other factors than just age.
(The writer is an investment consultant based in Rourkela)
