Equities have the ability to turbocharge returns and create wealth through the power of compounding. By not investing in stocks, investors may miss out on participating in India’s economic growth story and the upside of iconic companies. Read on to learn more.
Potential for higher returns
Equities have historically generated higher returns than other assets like fixed deposits, gold etc. over the long run in India. For example, the Nifty 50 index has delivered around 12% annualized returns over the last 30 years compared to around 7-8% on fixed deposits. So by staying away from equities, investors miss out on the potential to earn significantly higher inflation-adjusted returns that can help meet their financial goals.
Power of compounding
The power of compounding works wonders when invested sums earn high rates of return year after year. For instance, Rs 10,000 invested in equities growing at 12% annually becomes around Rs 66 lakhs in 30 years. But the same amount grows to only around Rs 22 lakhs at 8% fixed deposit returns. So investors lose out on the exponential wealth creation potential that equities offer over long periods.
Participating in economic growth
Equities allow investors to participate in the growth of the underlying businesses and the economy. As companies grow profits over time, their share prices tend to appreciate correspondingly. So equity mutual fund investors get to partake in the wealth generation process. On the other hand, fixed income instruments like FDs offer fixed returns irrespective of economic performance.
Hedge against inflation
Stock returns have historically beaten inflation by a wide margin in India. So equities help protect the purchasing power of investor wealth. But interest income from FDs, bonds etc. can struggle to even keep pace with inflation. So staying away from equities could expose investor money to the corrosive effects of inflation over time.
Lower tax outgo
Equity investment gains held for over 1 year attract 10% long term capital gains tax. Short term capital gains tax is 15%. Interest income from fixed deposits is added to income and taxed as per slab rates which can be as high as 30%. So investors can end up paying significantly lower taxes by earning from equities rather than fixed income.
Investing a portion of one’s portfolio in equities can provide diversification from fixed income, gold etc. Equity returns have low correlation with other asset classes. This helps reduce overall portfolio volatility and risk. Lack of equity exposure can result in concentrated portfolios vulnerable to market cycles.
Potential for wealth creation
Equities carry higher risk but also offer higher reward potential. While fixed deposits can help preserve capital, equities can actually help grow wealth substantially over long investment horizons. This gives equity mutual fund investors the chance to meet goals like retirement, children’s education etc. that may not be feasible with modest fixed income returns alone.
Equities form a key element of any well-diversified investment portfolio. Avoiding them could handicap investors through inadequate returns, lack of inflation protection and missed wealth creation potential. Hence, despite the risks, most investors are usually better off allocating a reasonable portion of their long-term savings to buy mutual funds that invest in equity.