Simple and safe way to invest in equities

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Investing in equity is one of the few ways of making big money - sometimes very big money. However, it comes with the risk of losing money - sometimes the entire amount. Therefore, despite the high potential, investment in equity is negligible when compared to the bank deposits/post-office schemes. The fear of loss is simply too overwhelming.

That apart, investing in equity is not easy.

- You have to have sufficient knowledge to understand the economy, markets and annual reports
- You have to spend considerable time analyzing balance sheets, profit and loss accounts, cash flow statements
- You need to monitor your portfolio almost on a daily basis
- You may not have sufficient corpus to build a meaningfully diversified portfolio
- Due to sharp market volatilities you are never sure when to buy/sell
- All the news flow, hype and conflicting opinions in the media only adds to the confusion
- You cannot depend on the tips as, more often than not, they are a trick to fool you
- Time and again the scams in the market have eroded the investor confidence
- You have to open a Demat a/c

Given all this, it is not difficult to understand why majority of the investors prefer the Simplicity and Safety of bank/post-office deposits.

But there is a way out. Yes, there is a Simple and Safe way to invest in equity.

Yes, you can invest in equity without the abovementioned problems. Yes, you can invest in equity with practically zero possibility of losing your entire capital. The answer is - SIP in Index Funds.

When you buy index funds (Nifty or Sensex), you are investing in top 30/50 companies.

- No need for you to analyze balance sheets, profit and loss accounts, cash flow statements of these top companies. They are anyway tracked by FIIs, MFs and other Institutional investors
- Corporate governance in these big companies is good
- Due to large equity base and diverse ownership, chances of share price manipulation are low
- Scams usually happen in small or medium sized companies. Even if there is a scam in a large company (e.g. Satyam), it may be a one-off case. Moreover it will be thrown out of the index. Thus its impact, over time, will be negligible
- Index funds do not require a fund manager
- All index funds are more or less same. So no problem of how to choose the best funds
- Fund management costs of index funds are amongst the lowest
- Since you are doing SIP, you don�t have to bother about when to buy
- No need to monitor it. When old companies go out and new companies enter the index, the fund will take care of it.
- You can diversify across the entire top-end of the market even with Rs.500/Rs.1000
- No need of a Demat A/c

So investing in index funds is as SIMPLE as making a bank FD/RD.

Now, let us look at the SAFETY aspect.

I did some number crunching on the Nifty from its birth in mid 1990s till 1st week of Mar 2012 i.e. a period of almost 21-22 years. I worked out the following

a) What were the returns after 5 years, if a person did SIP of Rs.1000 for 5 years (60 months) starting on any given day (around 4000 data points)
b) What were the returns after 10 years, if a person did SIP of Rs.1000 for 10 years (120 months) starting on any given day (around 2800 data points).

	Amount invested	Max. Value Return	Min. Value Return	Avg. Value Return	% of �ve returns
5-year SIP	Rs.60,000	Rs.174,000	Rs.45,450	Rs.84,400	20%
		37.14%	-11.40%	12.84%
10-year SIP	Rs.120,000	Rs.508,000	Rs.103,450	Rs.250,400	7.80%
		24.29%	-3.01%	13.25%

 

 

 

 

 

 

 

As you can see,

- Even in the worst case the loss was just 11.4% in a 5-year SIP. So don�t worry, you won�t lose your entire capital.
- Probability of making a loss was less than 8% on a 10-year horizon and that too just 3% in the worst case.
- Even the average returns of around 13% were far better than returns on FDs (moreover these returns are tax-free whereas your FDs would be taxable based on your tax slab)
- Treat equity investment as a long term one for 10-15 years like your insurance or PPF (or at least as your 5-yr NSC) and you will most probably end up with very good returns

By the way, suppose you started the SIPs during the euphoria of Jan 2008 when the Nifty was at the then all time high of 6288; but thereafter the 4 years have been the most tumultuous and uncertain in the history of the markets. Despite this and the markets trading nearly 1000 points down at 5220, you would still be in profits today [5.38%].

So that�s it - a simple and safe way to enjoy the fruits of equity - and smart too.

Sanjay Matai is a personal finance advisor ( www.wealtharchitects.in ) and author. � Millionaires don�t eat cakes�they make them � is his latest publication.