Equity Markets: Is it the Place to be in ?

“Hey, did you see the markets ? The Nifty was up 20 points today”, “Sensex is down by 100 points” are not something you might be hearing for the first time. People around us generally keep talking about the equity markets these days. We have one breed of “market experts” around us who are extremely confident of what is going to happen to the markets (or their favourite stocks) in a couple of hours. We also have other breed of “Burnt Fingers” who never want to talk about the equity markets, forget about investing in it. So, who is right ? Is the equity market the place to be in or not ? Lets discuss.

Both the examples quoted above are examples of two extremes. There is a third breed of “undecideds” who want to bask in the glory of equity markets but also don’t want to play “risky stunts” with their hard earned money. They keep seeking opinions from people and when they come across these “market experts” and “Burnt fingers”, they get more confused. All these mindsets are a result of some myths about the equity markets and once you hit the reality, you will have some clear picture of whether or not you should be a part of this market.

Myth 1: Equity Markets is a Gamble. Go only for fixed income products

Reality: This is the doubt in the mind of maximum people. Reason for their doubt is, there are no assured returns. Agreed, but that also gives you some headroom for growth. To make you understand this better, lets take a beautiful case study as below:

Mr. Dev (Name Changed) was in government service and retired in 1996. He received a sum of Rs. 30 lakhs (as the maturity amount of various deductions in his service). He put this entire amount in bank FD for 5 years with a nationalised bank who was offering a rate of 14% p.a. at that time. He received an interest of Rs. 4.2 lakh p.a. or Rs. 35,000 per month and was enjoying his retired life. But things became difficult at the time of maturity of the FD. Mr. Dev went to the bank and asked the banker to renew it at the same rate. The banker smiled and replied that he can renew it but only at the prevailing rate, which happened to be 6.5% p.a. Mr. Dev’s cash inflows suddenly collapsed to Rs. 1.95 lakh p.a. or Rs. 16,250 p.m. To make things worse, inflation during that period had made Mr. Dev’s requirement to around Rs. 42,000 p.m. Now, Mr. Dev was in a total fix. To plug this shortfall of Rs.25,270, he had to now start withdrawing money from his lumpsum capital of Rs. 30 lakhs (which put further pressure on his interest income and further widened the shortfall). As a result, he had used up all his capital within a span of 7 years and had almost no money left thereafter, still having a life expectancy of 5-7 years for himself and 7-10 years for spouse.

The problem with fixed income products in todays market is, they can-not protect you against inflation. I am not suggesting that Mr. Dev should have invested his retirement corpus in the equity market. All I am suggesting is, you will be needing a much higher corpus at your retirement to beat the inflationary effects. If you are young, this is the right time to enter the markets and create wealth for yourself in the long term.

Myth 2: I never land up buying the right stocks

Reality: Quite true in many cases. But then, should that keep you away from the markets? If you do not have the time and expertise to research the right stocks for yourself, take the route of collective investments i.e. mutual funds. The fund managers have the resources and expertise to pick up the right stocks and also what and when to buy and sell. Thus, you can ride the bandwagon and earn returns on your money much higher than your traditional bank FDs.

Myth 3: I should keep buying and selling as and when my stock broker tells me to do so.

Reality: In my opinion, keep away from short term trading and even worse intra-day trading. In short term, the only person making money is your stock broker, while all the risk of losing money lies with you. Equity is an asset class which will create wealth for you in the long run. Never ever try to do a “Hit and Run” business in the stock market. It might work once or twice, but overall you will stand to lose.

Myth 4: The Sensex is at too high levels currently. I will wait till it falls below 10,000 levels and then I will invest.

Reality: As an investor, never try to time the market. It is regular investment at all levels that will help you to create wealth in the long run. I am not saying that you will not create wealth if you invest below 10,000 levels. But then, what if the markets do not fall to those levels? You will be sitting on idle cash being eaten away every day by inflation. Also, if the markets fall below 10,000, someone might “tip” you that it will fall below 7,000 and you again keep waiting, only to realise that the markets bounced back from 9,500 levels and you are again left punching your palms.

The best strategy is to fix up a small amount from your monthly income and invest regularly. Over a period of time, you will reap advantage of both, rupee-cost averaging and power of compounding.

Myth 5: Equity markets are good. So I will buy a ULIP rather than an endowment plan.

Reality: This would be like saying, “The frying pan is too hot, I will rather jump into the oven”. You will be exposed to more heat there. The basic idea is, never try to mix investment and insurance with each other (I might be stating this for the Nth time now). When you need insurance, go for a pure term plan, which gives you highest risk cover at the lowest premium. Investing in ULIPs, because equity markets create wealth in the long term, could have been a great idea, if ULIP was the only product available to invest in the market. In my opinion, ULIP can never be a good investment option, whichever criteria you put it in. (For details on ULIPs, please refer to my blog “Look before ULIP”)

Myth 6: All my friends are making money in F&O. If I don’t do it, they will find me dumb.

Reality: Don’t give in to the peer pressure. Futures & Options are “Financial Weapons of Mass Destruction” as per Warren Buffet, the greatest investor in the world. (http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf)

Your basic idea is to create wealth for yourself. Do it steadily through systematic investments. There are no magical investment avenues which will create wealth for you overnight. If your friends want to think of you as dumb, let them. Time will prove who is dumb, when they start losing money in F&O.

Myth 7: I will choose 5 Stocks for myself and trade only in them

Reality: Though this might appear to be giving you some ease of operation (research, tracking, monitoring etc) it will expose you to the concentration risk. Thus, instead of choosing 5 stocks for investing, choose 5 mutual funds for yourself, which will also give you similar ease of operation but will protect you from concentration by giving diversification benefits.

In a nutshell, be an informed investor. Don’t be lured away by greed and repelled away by fear. Equity markets can act as a double edged sword. If handled properly, might win you wars; If not, might hurt yourself as well.

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh.nidhiinvestments@gmail.com if you have any questions.

(The views mentioned in the article are personal opinion of the author. The readers are advised to use their own judgement and consult their investment advisor before making any investment decisions.)







Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert. He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com . He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

11 thoughts on “Equity Markets: Is it the Place to be in ?

  1. gr8 question answer… It will really help people like me who don’t know ABCD of this market ups and down.

    Already started waiting for next…

    1. Thank you So much Giriraj Bhai for your support and appreciation. I am working on my next blog. It would be great, if you want to suggest me a few topics that would interest you. Thanks again.

  2. Very informative article sir !! You nailed it on its head that it is a systematic process; no investment which would create wealth overnight.
    Looking forward to more articles 🙂

  3. Excellent Article Sir !! A total 10/ 10 article removing all the doubts I had about the equity markets.

    Eagerly waiting for the next one !!

  4. Good Article. Just don’t know how much I will agree with last point of direct equity versus mutual fund? May be some insight about when to choose equity and when to choose mutual fund is good point of discussion.

    Mutual fund no doubt is instrument of investment for long term. Equity whereas seen as trading but can’t equity also be investment. Get good blue chip stocks and hold them.
    Mutual fund diverify & split the risk between many stocks and most important point managed by professionals. Given enough money, can it be compared with Portfilio Management?

    Look forward for more such blogs that will educate people. Thanks for sharing your exp, knowledge and prespective.

    1. Thanks for your valuable comments sir.

      Ok, why do we need to do a equity Vs Mutual Fund at all ?? We can very well have a good mix of both in our portfolio.

      You should definitely go for holding on to some good blue chip stocks. But for those, who dont know, which are blue chips and how to identify, they can go through mutual funds (than to avoid equity altogether).

      Portfolio management is definitely an integral part of mutual funds. But what we are talking about the retail investor who is planning to save smaller sums of money 5k-10k per month to create wealth in the long term. Once he has that wealth, he can definitely look at hiring someone to take care of his portfolio.

      Thanks again for your insights. Look forward to more visits and feedback.

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