You must’ve heard from someone that when it comes to long-term investment, go for equity-backed investments. Even if you don’t, no problem! But, it is very common and there is a solid reason behind this. Nowadays if you are exclusively depending upon the fixed deposit type savings then you need to know that those savings are very little especially when you dream of avoiding hardship in the future. Unless you have some source of rental income or a government pension plan, you will have to fight inflation all by yourself.
So, what do you think?
How are you going to handle this?
Well, the only option you have is equity-backed investments. It is because the biggest challenge facing in any form of investment is to beat inflation or rising prices. It is the only asset – class that manages to beat inflation and earns positive returns. The reason behind this is depreciation of money over time. The Rs. 1000 had great value in the 1990s but not now. The same thing could happen to Rs. 1 lakh in 2030. So, if anyone has a chance then it is only the equity. It is the key asset class that has some possibility to beat inflation to earn positive returns in the long-run. However, the problem is with Indian culture where investment methods are changing but not fast enough.
There was a time when India was a pure fixed-income country. All financial investments were only associated with deposit-related only. At least it was true till the mid-1990s. After that, there rose a small but distinct equity culture where many people start investing in equity mutual funds. But, seeing the population of our country and the money invested in the fixed-type products, equity exposure is so small.
To understand how equities can subdue inflation we have to go back in time when there were only two types of investing money – either you lend it to someone or you own your own business. When you lend it, you get a basic return? And if you are good at doing business then there is no better way to invest money except investing in your own. Isn’t it?
Fortunately, now with the availability of the stock markets, anyone can become owner or part-owner in a business with very few challenges to face compared to what real owners face. When there is a growth in the economy, the returns are better. On an average, the stocks should grow at least equivalent to the growth of the economy. And FYI, the inflation rate is built into the growth of the economy.
So, if you are good with selecting stocks then you can easily beat the general rate of economic growth by a larger margin. The only thing which stopping people to invest is ‘volatility’. So, it would be smart to avoid short-term volatility and take a long-term view.
You don’t have to believe our words or anyone words. Look at the graph. It will tell you everything graphically which we said earlier. And do not forget!
So, if you take a look at the graph for more than 5-10 years, you will see drastic growth in it. But, if you go for short terms like days, weeks, and months, you may see many ups and downs in the stock market. But, going for equity-based long-term investments would reduce volatility significantly.
Thus, by investing in equity for long-run is the only way to beat the inflation without taking risks of capital loss.
By Wasim Raza
who wrote I have 7 Years of experience as a research analyst. I have seen lots of ups-down in finance market. Currently I am associated with Advisorymandi. It is a unique platform between advisors and traders/investors where they can easily connect with each other for stock market, commodity, and Forex market related information, guidance, and advisory etc. It is the platform which provides pragmatic and unfathomable research and advisory in the stock market, commodity market, future & options, and currency market.