Equity Markets are known for their volatile nature in the world economy. The general perception of the investments into the stock markets is slightly negative in India. I have generally seen people investing into safe havens like fixed or recurring deposits. In this article, I am going to unfold the secret of how one can have a fixed deposit in the stock markets. We will discuss the overall benefits of the investments in to equities (direct and indirect), followed by tax benefits and liquidity and finally returns on equity investments in the long-term which will be based on the movement of nifty from its inception in 1996.
If you wish to invest into equity markets, there are broadly two ways of doing it, namely, direct equity and indirect equity investments. Naturally both are subjected to market risk but there are slight differences in the risk measures in managing the investments.
Following are the points of comparison between Equities and FDs:
- Liquidity: Fixed deposits have a lock-in of 5 years for them to reap you tax-free returns. If you liquidate FDs before 5 years, you lose the interest part for the remaining tenor as well as the taxes as per the individual tax slabs, will be applicable. On the other hand, equity investments are no less liquid than the FDs. The investor would not even lose out on the returns on the same. Investor gets the funds within two days post the sell off. The only difference is that equity investments do need some level of planning in investment and redemption part of the portfolio.
- Taxation: FDs give you a tax benefit over the gains after you have been invested for 5 years, while the equities provide you the same over a period as short as 1 year.
- Returns: The post tax returns on a FD over a horizon of 1 year is as low as 6.5%, which will only reduce your purchasing power or keep it almost the same as last year. But the requirement is to increase your purchasing power, which only medium or high risk assets can provide. Equity, over the long-term, has been giving an averaging return of 14-15% each year. That means, you are beating the persisting inflation by almost 7-8% every year.
I have analysed that the fear persists in the minds about the equity markets because of speculative mindset. A speculative mindset always looks for the opportunity to gain in short-term. That leads to many losses by the end of his/her consecutive trading sessions. Many people think about intra-day gains as well where they play on a certain stock on the daily price movement. Another mistake the investor makes is they think “markets are falling or rising because of what happened”. But the truth is “markets fall or rise because of what is going to happen rather than the past”. In this process, the investors (who wish to make long-term gains) turn into traders in the hope of short-term gains. The markets are always going to be volatile in the short-term. The Volatility Index in short-term ranges from 22-28%. A long-term investor should never try to time the markets.
It is not about timing the markets, it is about the time spent in the markets that matters – Warren Buffett
In India, we can categorize people as investors, speculators and safe haven lovers. Investors always look for long-term gains, speculators play on day-to-day pricing and safe haven lovers are just simply risk averse. Although, I am not a great fan of speculators, they have their own ways of dealing with markets. Whats creates the other two categories of people? Any guesses? There is that one aspect that bifurcates the two. That aspect is PATIENCE. Do we really check our Fixed deposits values everyday? I guess no. But if we invest even 5% of our savings into markets, we tend to check the values everyday without fail. I will not suggest not to check because its ones hard-earned money, but the frequency should be much lesser.
The image below will show you what PATIENCE can do. But the concept of patience applies to the top companies with extremely good fundamentals. Small caps and mid caps are generally not recommendable for long-term investors. An investor should always diversify. In equities as well, the diversification would be in terms of direct (stocks) and indirect(mutual funds).
The image above is the returns on nifty in the past 20 years. The green areas indicate positive returns while the red ones indicate negatives. The power of long-term investing is evident here. As the horizon of investment increases, the red areas have vanished and the investments have grown exponentially.
To sum up, put your investments into equity markets. The point to remember is to invest into the right stocks (preferably companies with strong fundamentals). It is important to have your portfolio more into markets to beat the inflation. If you are not able to pick the right stocks, then invest into the equity oriented mutual funds. With increasing age, slowly start diversifying into debt funds and balance out the portfolio to give you optimum returns in the long-term. Have patience, think of the equity investments as fixed deposits and get the best experience of wealth creation. Plan your goals, keep your liquidity stable and invest the surplus in the right assets. Hope this helps you have an insight to the brand new “Equity FDs”. The key is invest in the right assets and forget and always focus on the long- term perspective.
Last but not the least, views expressed are my personal opinions. Investments are subject to market risks. Happy investing.
Thank you 🙂