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10 Jul 2020 by Pradeep U
Have Goals? How Investing In Stock Market Can Help You - Research & Ranking

Remember when the markets crashed by close to 13% on 23rd March 2020. Many investors, who ran away from the stock markets, would have now missed out on 40% gain from March till now. Well, but the objective of my today's story is not to tell you that:

  • Markets always go up in the long run
  • Investing during times of crisis can result in significant wealth creation for the times ahead. Discover why?
  • Systematic investments for long run are always recommended

In my previous stories, I spoke to you multiple times on the same about the importance of each of them. However, in my today's story, I will speak to you about why one should not ignore equities to achieve long term goals.

To demonstrate the power of investing in stock market, let me give you an example. 

Akash, now aged 30, is aware that he needs to start planning for his three important goals:

  1. Buying a car
  2. Daughter's education
  3. Retirement

His daughter is just 1 year old, and Akash is getting worried about the educational expenses. He also knows he needs to buy a bigger car in the next 5 years as well as save enough to live a comfortable retirement life. He knows he would need a certain amount to achieve his goals.

Based on his goals, he has invested certain amount towards his goals.

  • Rs. 4 lacs towards bank FD's for his car, while investing additional Rs. 2,000 each month.
  • Rs. 5,000 each month towards gold for his daughter's education.
  • Rs. 3 lacs each year towards his PPF for his retirement.

Let's see after the end of the investment horizon, how his investments would turn up:

Goals

Time Frame

Asset Class

Target Amount

Investment value at the end of the tenure

Car

5 years

FD

Rs. 6 lacs

Rs. 6.8 lacs

Daughter's Education

20 years

Gold

Rs. 30 lacs

Rs. 41 lacs

Retirement

30 years

PPF

Rs. 1 crores

Rs. 4.3 crores


(Source: FD: SBI interest rates, Gold: bankbazaar.com - historical gold rate for 20 years, PPF: Daily tools PPF calculator. Historic rates have been considered while calculating future returns. The actual rates may vary).

Well, sounds exciting? Akash is able to achieve all his goals through his investments and in fact, has additional corpus left. But wait...can it be so simple?

Here, Akash made a big blunder of ignoring Inflation - the demon that reduces the power of money over time. So if Akash purchased goods worth Rs. 100 last year, it is worth Rs. 106 this year, considering an inflation rate of 6%.

Considering the inflation of 6%, here is the actual amount required to achieve the goals at the end of the tenure.

Goals

Target Amount

Amount required after considering inflation

Investment value at the end of the tenure

Shortfall

Car

Rs. 6 lacs

Rs. 8 lacs

Rs. 6.8 lacs

Rs. 1.2 lacs

Daughter's Education

Rs. 30 lacs

Rs. 96 lacs

Rs. 41 lacs

Rs. 55 lacs

Retirement

Rs. 1 crores

Rs. 5.7 crores

Rs. 4.3 crores

Rs. 1.4 crores


As you can see above, his investments in traditional asset classes such as fixed deposits, PPF and gold is not enough to meet his goals after considering the inflation rate. So, what can Akash do? He has to invest in asset classes that deliver better returns. That's where the role of equities come into picture.

Equities have delivered better returns than other asset classes in the long run, while also beating inflation.

Let's say you invested Rs. 1,00,000 in FDs, Gold, PPF and equities 20 years back. Here is what you would have made by now: 

PPF

FD

Equities

Gold

Rs. 5.6 lacs

Rs. 3.5 lacs

Rs. 9.6 lacs

Rs. 8.1 lacs


(Source: FD: SBI Historic Interest Rates, Equities: Nifty Total Returns Index, Gold: Bankbazaar.com Gold Historic Rate, PPF: Daily tools PPF calculator)

As you can see above, equities don't just help you beat inflation, but also generate significant returns to help you achieve your long term life goals.

How To Invest In Stock Market?

Many investors don't invest in equities thinking it is risky. Yes, equities are risky, but in the short. In the long term, the risk decreases, while the returns increase. We have penned down 4 best practices while investing in equities.

Invest in tranches:

This is an effective way to reduce your risk exposure. When you invest in tranches, you can take advantage of cost averaging, which works best for cautious investors. In this way, you can take advantage of market corrections by buying more at lower price, thereby reducing your overall cost price.

Avoid greed and fear at any cost:

Don't be in a hurry to invest because the stock market is in a bull phase or exit a stock when the stock market is in correction mode. When you invest in the right opportunities, it can withstand any kind of uncertainty and outperform with time.

Invest only after detailed research:

Before investing in any stock, it is important to understand why you are buying it. It is essential to check the profitability, debt and future growth prospects of the company before investing. This will give you confidence, as you know the actual reasons which will bolster the growth of your investment. When you invest in fundamentally solid companies such as Maruti Suzuki, Eicher Motors, Pidilite, Reliance, HUL, TCS, Wipro, etc., the returns are more lucrative.

The early you start, the better are the returns. 

We've heard this before as well - The longer you stay invested, the more lucrative are the returns.

To understand this, let's take an instance of two cases, Jai and Akash. Jai starts investing from the age of 25. He invests Rs. 5,000 a month. Akash starts investing at the age of 35. By 50, Jai can accumulate Rs. 94.88 lacs, whereas Akash can gather only Rs. 25.22 lacs by investing the same amount for 15 years. The difference is a whopping Rs. 68 lacs just by starting ten years later.

(Assuming value of investment at 12% p.a)

To conclude, it all comes to how you respond to the fear. The stock market is not an easy way to create wealth. There will be ups and downs. Investors should be psychologically prepared to remain invested and have the patience to bear the temporary losses for long term gains.

And lastly (and most obvious), don't time the market. Rather than that - trust the market. If markets have rewarded many investors in the past, there's no reason it would not reward you if you:

  • Remain patient
  • Adopt a systematic approach
  • Take research backed decision

 

 

 

 

 

 

 

 

 

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