Investments a Virtue
In India investment in stocks has
been more of an abuse then a virtue.
It is observed that the stock
markets are being used as tools of excessive trading and speculation and less
for long term investment. Also people who do not invest in the stock markets,
are happy to watch their money lose value in the banks in savings accounts,
current accounts and fixed deposits.
Let’s see what happens to your
money if you make a Fixed Deposit of Rs. 10,000@ of 9% per annum which is
taxable. Assuming average rate of taxation 20% you would be paying Rs.180 as
tax on the Rs. 900, this leaves you
with net earnings after tax of Rs. 720. In 5 years you would make a profit of Rs.720
x 5= Rs. 3600.
The price of the same commodity
going up over the years is called inflation.
Inflation in India has been around 8% for the past many years. At an average
rate of 8% inflation, the product which was costing Rs.10000 has become Rs.
14000 after 5 years, whereas your
investment in a Bank Fixed Deposit has grown to only Rs. 13600 (post tax). So
you are poorer by Rs. 400 at the end of 5 years, effectively your money has
lost value , in terms of the lost buying power of the money. Can you imagine
how the value of your money is lost if you let your money be idle in saving and
current account?
And as Robert G. Allen one of America’s
most influential financial advisors has rightly said "How many
millionaires do you know who have become wealthy by investing in savings
accounts? I rest my case." However, saving account
must hold money for your immediate and emergency needs for at least six months
to a year.
Having said this, what are the
avenues to invest other than your own business? The right answer is a mix of
Gold, Art, Real Estate, Bonds and Equities depending upon your needs and goals.
Today I am discussing only
Equities as my opening remark needs to be justified. In India there is a gross
lack of education, for the investor as well as the intermediary who service
these investors. Time and again we have seen that because of lack of education
the investor in equities have made investments, hoping to make profit in a
short period of a few months, weeks, and days and sometimes they expect to make
profit on the same day. In their zeal to make quick profits they become traders
from investors, without knowing the consequences of the same. They land up
paying huge transaction cost and brokerages and in the bargain lose their
entire capital. Now my opening remark makes sense.
This is the most dangerous thing
which has been happening to the investments in stocks. As, once this person
loses money they never invest in the stock markets and let their money idle in
banks.
Let’s see now how investments in
stock can be a virtue.
Ever wondered what do banks do
with their money? How do they pay your interests on deposits? How do they meet
their expenses of thousands of branches across the country? Well, you should not
be surprised to know that banks give loans. They give loans to individuals as
personal loan but the biggest borrowers from the banks are the corporate. The
corporate take loan from the banks for new projects and working capital
requirements. These corporate after paying the Banks an interest rate of up to
18% per annum and still make profit.
Now if you can invest in these
companies you would also reap dividend and growth. Through the stock markets
one could invest by becoming a share holder of companies. However one has to
educate himself to identify the profitable companies with good management and
having made consistent profit over a period of years with high growth.
There are risks involved while
investing in stocks. These are Systematic risks and unsystematic risks. Risks
like political, natural calamities, breakdowns, labour unrest, wars, trend
change, competition, new inventions, consumption, etc. can erode your
investment value. However it has been seen that if one has invested with good
companies, they adapt to change with innovations and manage their risks, such
that over a long period they would be in profit.
The risk gets mitigated if the
investment is for long term. In late nineties Sensex was near 4000 whereas
today Sensex is near 28000. The markets have witnessed uncertainty of coalition
government, Kargil war, nuclear tests, sanctions on India, down grade by rating
agencies, major crash of 2008. The issues appear irrelevant today when markets
are scaling new highs. This shows that over a long period companies perform and
if companies perform so does the stock markets, which in turn deliver decent returns.
So friends, investments in stocks
is a virtue , if you have a diversified portfolio with the leading sectors and
the leading companies from each sector and have a time horizon of more than 5
years.
Please ensure that next time whenever
you have savings, you will not let it idle in the banks, and if you think of
investing in stocks, you do not abuse it by becoming a trader as we have seen
that more than often, the trader destroys his wealth and with the wealth gone
destroys his health.
Request you to make investments
in stocks a virtue and enjoy a healthy, wealthy and prosperous life!
Best wishes for the New Year!
Anup Gupta
Disclaimer:
The views expressed in the above article are my
personal views. The writer, SREIL, its directors and any of its assigns will
not be responsible for the correctness, completeness or quality of the
information provided. Liability claims regarding damage caused by the use of
any information provided, including any kind of information, which is
incomplete or incorrect, will therefore be rejected.