Take stock of the future

Ankush Vashisht believes in making his money work as hard as he does. And, for him, equity is the best as it outperforms all other asset classes in the long term.

“Having chosen it wisely, double digit returns in high teens along with power of compounding has worked wonders for my portfolio,” says Vashisht. While he understands the importance of asset allocation, Vashisht feels that equity is the only way to get desired returns for specific goals in life. He will need at least Rs 50 lakh by 2020 to send his daughter abroad for higher education. And, he is quite confident of doing so.

He invested in equity by putting aside Rs 50,000 to Rs 1.5 lakh every month for the past 10 years. Vashisht invested directly in cherry-picked stocks that gave him fabulous returns. Take for example Yes Bank, the shares of which he bought at Rs 65 and sold for Rs 1,400. There are several such stocks in his portfolio.

Even as asset allocation plays an important role in financial planning, experts believe that earmarking a large component to equity with age on your side can fetch very good returns.

“For all goals, you must take into account inflation and the fact that the value of the goal will change,” says Sanjiv Singhal, founder and chief operating officer of Scripbox, an online mutual fund investment platform. “Something that costs 0100 now will cost Rs 200 in about 10 years. In certain cases, the cost will go up even faster. So you need to save up for the higher amount.”

Secondly, you must estimate the amount to be saved depending on the savings vehicle. Equity is recommended for long-term goals, but if you are nervous and want to opt for a recurring deposit instead, you must know that the amount you will need to save would be twice as much for a goal that is 15 to 20 years away.

Nowadays, there are multiple options in equity—from diversified mutual funds and exchange traded funds to directly investing in stocks—and you can choose one that works best to your advantage and convenience.

One should always have a holding horizon of four to five years, say experts. Money needed in the next three or four years should not be deployed in equities. “Equities as an asset class is also helpful to fund one's daughter's marriage, children's education, etc,” says Siddharth Oberoi, founder of Prudent Equity, a stock advisory firm. “One can keep adding to one's savings and investing those regular savings into equities. If the capital can compound at 20 to 25 per cent per annum, most such future goals can be achieved. For example—If Rs 5 lakh invested in equities can compound at 25 per cent per annum, the capital becomes Rs 15.25 lakh at the end of five years and Rs 46.56 lakh at the end of 10 years.”

However, there has been a traditional aversion for equity as an asset class in India, primarily because of the risk attached to it. That is why less than 5 per cent of households in India invest in equities. There is a risk, undoubtedly, but if you are careful in selecting the stocks or mutual funds, it can surely give much better returns than other components of your portfolio.

Take, for instance, the story of Geeta Parashar, a junior scientist. Her family of five—she, her husband, two daughters and one son—plans to visit Switzerland in 2018. Parashar chalked out a strategy for her visit and the first thing was planning for the money. The trip would cost her about Rs 7 lakh. She started putting in Rs 20,000 every month in systematic investment plans of various mutual funds, primarily large- and mid-cap funds. Parashar is quite happy with her choice and now advises her relatives to take the mutual fund route to plan for funds.

But, should one invest in direct equities or equity mutual funds? Well, when you invests in mutual funds, you buy a basket or portfolio of stocks. A typical mutual fund portfolio will consist of 20 to 25 stocks, each with its own price movement, which may sometimes cancel others out. On the other hand, direct investment in stocks is prone to market volatility, which can be triggered by an economic or business announcement affecting that company.

To invest in direct equities, you not only have to be abreast with the developments in the economy, but also keep a close track of the companies in which you have made an investment. You need to have a deep understanding of the company you invest in, its economics, the industry the company operates in and its valuations, among others things. In the case of mutual funds, you do not have to look at valuations or actively monitor your investments.

“A retail investor should go with only those advisories which have long history of operations and those that have been able to generate good returns in the past,” says Oberoi.

Mutual funds are a diversified investment vehicle wherein professional fund managers manage money in line with a fund’s investment objective and strategy as mentioned in the offer document.

“Although mutual funds provide a simple way of investing in the market, it can be a bit tricky,” says Hemant Rustagi, chief executive officer of Wiseinvest Advisors. “Investors have to make certain important decisions such as fund selection as well as deciding an ideal mix of funds in the portfolio, that is multi-cap, large-cap, mid-cap, thematic, sector and speciality funds. Besides, investing in the right proportion is critical in ensuring that the portfolio suits one’s risk profile and requirements.”

Every investor expects funds in his portfolio to always do well. In reality, however, there can be certain time periods when the performance of some of these funds may slip or become inconsistent. Although a situation like this can create panic, one must put performance in a proper perspective and analyse the reasons for it. For example, if a fund loses ground in a falling market and falls in line with its benchmark index, it should not be much cause for concern. That’s because the stock market has a tendency to be volatile over short and medium term.

On the other hand, if a fund goes down when its peers are giving positive returns, it should be taken as a warning signal. Remember, a skilled fund manager with a well-defined mandate can ensure that the fund remains among the front-runners consistently.

“Equity mutual funds are not invest and forget kind of investments,” says Singhal. “Performance of funds changes and you must review your investments every year and take a decision whether to continue with the same funds or not.”

Similarly, while analysing the consistency of a fund that invests in a particular segment of the market such as a mid-cap fund, the key is to consider the level of volatility that the segment itself may have been witnessing.

If inconsistency in the performance becomes a regular feature, one should not hesitate to get rid of such a fund. Most investors suffer not only because of the wrong selection, but also because they continue to hold on to these funds for years.

“Don’t ever make exiting from a non-performing fund at a loss an emotional issue. At the same time, don’t rush to make changes in the portfolio every now and then,” advises Rustagi.

Although a majority of people invest in pension products and long-term debt products for their retirement, experts believe that equities are the ideal product for retirement planning.

“Retirement is a long-term goal (30 to 40 years away for most people) and beating inflation is critical,” says Singhal. “Therefore, equity must be a major component of your retirement investing. If you choose to go with fixed income for retirement planning, the amount you will need to put aside every month will be double of what you will need to do with equity.”