We invest in Equities only for higher returns than Fixed Deposits and Debt investments!
If we are happy with only FD returns where our capital is protected and we do not see any ups and downs, this is perfectly fine. Returns on debt related investments and FDs are comparatively low and are steady – around 4% to 6% per annum today where our capital is protected with no major fluctuations, unless there is a rate cut or hike which too is usually very marginal. But these returns are usually lower than the inflation rate.
It is but natural therefore that we want higher returns than FDs and so we invest in other investments such as equities, gold, real estate, etc. But there is a catch and risk which we must understand clearly and also accept if we want these higher returns.
This is why Risk–Profiling plays a very important role in financial planning.
Risk profiling needs to be done for not only planning the time horizon for each investment but also to understand our emotions and attitudes towards being able to handle risk. Some investors maybe very rich millionaires but cannot stomach market volatility or corrections and therefore have a low risk profile. Others who have only a few lakhs invested may be able to take 100% risk with their money and handle all these ‘shocks’ very well! Finally it is a balanced approach to risk profiling based on our financial goals which will lead to sustainable success of returns.
Returns of equity can be defined in this simple formula i.e. Equity Returns = GDP + Inflation.
Therefore, we can expect around 10 – 12% per annum returns from equity over a 5 to 7 year period. This is a differential of approximately 4 – 5% more than FDs or Debt investments per year. If this difference compounding on the regular basis, it will add great value to your wealth. great way to add to your wealth.
Below is a table comparing the Performance of Sensex VS FD returns over the past 40 years for your reference. As you can see long term investing in equities gives almost 10X returns over FDs.
The moral of the story is that yes Equity is a risk, but only if you are investing on it for the short term. If you want to stay ahead of the inflation curve, it is a necessary component of your asset allocation plan. If you continue to stay invested and participate in the Equity Market over the long term, you should have no trouble with your financial goals and anticipated returns for you and your family’s safety.
We urge you to have conversations with certified financial planners who can help with your risk profiling and therefore asset allocation portfolio. They are in the best objective position to help you understand and mitigate the risks of letting fear get the better of you.