Here is why every investor should invest in stocks and mutual funds !

Have you ever asked yourself the question why you should invest in stocks and equity diversified mutual funds ?

The reason people invest in stocks is  because they think it will make them rich quickly. This sentence is correct but till the last one word. Drop the word “quickly” and replace that with “over a long period of time”.

The sentence should be correctly interpreted as “the reason people should invest in stocks and mutual funds is because it has the capability to generate the highest returns over a long period of time”.

Returns from equities beat any other asset class

The stock market can register negative or zero growth in some years, but over a long period of time it is the only asset class that generates the highest returns as compared to any other asset class.

That is right – it beats real estate, debt investments and gold as far as returns are concerned. What is important here to note is the catch phrase – over a long period of time.

This can be anything from 5 years to 20 years or more. Ideally 5 years should be the minimum though you often hear that to be 3 years as well.

Let us see the returns in India over different asset classes over a period of time.

If you note above, equity returns over 5 years or 10 years is more than any other asset class – real estate, bank FD or gold. This is proof enough of the fact that to build a corpus over a long period of time, equity is the only vehicle that can make your money grow fastest.

The way to invest in equity is either by buying shares of companies or investing in mutual funds.

If you want to buy shares, then you need to time your buy well. If you purchase a stock at its highest value ever, you will have to wait for ages for it  to give you some returns. This is called trying to time the market and investors don’t have the capability of doing that.

If you want to avoid to time the market, then mutual funds is the way to go. Disciplined investing via SIPs (Systematic Investment Plans) will be ideal for the small investor. If you invest either way over along period of time, you are sure to get rich slowly but surely.

Why long term

Studies have been done on the Sensex returns since the time of its inception in March 1979 when it started at 100 units. The studies reveal that if someone held the Sensex for a year (buy Sensex on any day and sell exactly after a year), then his average returns would be 29%, however, his maximum return and minimum return would vary between 260% to -45%.

Isn’t that a huge risk to take with your money in the hope of some quickfire returns ?

If the holding period to taken as 5 years, his average returns would be 25%, however his maximum return and minimum return would now look like 50% to -5%. What this means is that if the investor held onto equity for more years, his risk became less, that is, his chances of losing money became less.

If held for 12 years, there is no risk at all – that is, the investor will not lost his money at all. For 15 years, the average return is around 15% with maximum return as 27%  and minimum as 8% (plus 8% !!). That is  the power of equity.

This shows that if equity is held for longer term, the probability of losing money is zero and that of making money is positive.

To summarize :

• Timing the market is not important, its the time in the market that is important.
• Equity investment gives the best returns, only over a long period of time.
• Investing in equity has to be done in a planned and systematic way.