Equity as an asset class – Part II

Welcome to Part II of this series.  You can read the Part I here.

Hari asked them to be very clear about their investment objective. If they have a long term vision to meet the family goals of children’s education, larger car and house, retirement etc. then equity should be an integral part of their portfolio.   As the economy moves in cycles, so does equity returns.  When the economy does well, you may expect good returns and when it falters, be prepared for correction in equity prices.

The key to successful investing is asset allocation and they should not invest money they may need in the short run into equity.

He brought out the different features of equity investments.

• It is one of the few asset classes along with real estate which has the potential to give above Inflation returns in the long run.
• Investing in fixed income erodes your portfolio due to inflation. The average inflation in the last 10 years is more than 7.5% and during the same period, the average return on Fixed Deposit is 7%.  So, fixed deposit doesn’t protect your investment against the inflation risk.
• As the Indian economy continues to grow in the long run, equities represent a great opportunity for us to participate in this growth story.
• Plus even from a diversification viewpoint, we can invest in international funds which give us exposure to global economies including USA, China, ASEAN and Europe.
• Equity mutual funds are highly liquid. Unlike asset classes like real estate, the money invested in equity is highly liquid and you can get your money quickly.
• In addition it has one of the lowest transaction costs. When Hari started investing in 2000, the cost of a transaction could be as high as 1% for an equity transaction. Today for direct investments in equity, the transaction cost could be as low as Rs 25 per transaction. In addition for investing via mutual funds, direct plans reduce the cost of investing.

The key point to note here is that equity should definitely an integral part of your long term portfolio.

Hari said, it would be apt to quote Mr Warren Buffet in this regard.

“Think long term and be patient.  No matter how great the talent or efforts, some things just take time.  You can’t produce a baby in one month by getting nine women pregnant”

See you soon in the concluding Part III of this series.