Equity - Friend or Foe

My friends, especially senior citizens, were very uncomfortable whenever the question of investment in equities was discussed amongst the group. Nobody said no, but they did not invest in equity either. This made me to think why this mind block. I remembered my service days when I was equally scared of putting a larger chunk of my savings in equity. I preferred life insurance. Apparently we all suffered from the fear of the unknown.

We have a pretty good idea about pricing of most of the assets class of investments. Equity is one big black hole where pricing mechanism knowledge is concerned. Major factor in pricing of equity is the intrinsic valuation of the industry it relates to. This part everyone understands and has no problem with. Second and far more influential element in pricing is the perception of future earning possibilities of the particular company/industry. This brings in an element of personal arbitrariness bordering on gambling. Most of us are very uncomfortable with this hence prefer to stay away, which is sad.

One fact cannot be overlooked. Equity is the only liquid investment opportunity to keep pace with and stay ahead of inflation. In short, equity is both Dr Jekyll and Mr Hyde. By controlling our natural greed we no doubt reduce the returns from equity but also drastically bring down the risk of losing the hard earned money. One has to find ways to befriend the good and avoid the evil- something we as it is do every moment of our existence.

Equity for us has to be a long term investment. If we need to encash part of our investment we should do so well in advance as otherwise the market may fall and we suffer avoidable loss. This is the nature of this market hence we have to plan accordingly. When people play the stock market for short term gain, it should not concern us as they win or lose heavily, fully conscious of the risks involved. The fact someone lost heavily should not scare us or keep us away from the market.

Today investment in equity has been made easy for us. Mutual Funds are a recent entry which reduces the risk element and therefore give lower returns. These lower returns are in comparison to direct investment in equity, but still higher than any other return on investment. Mutual Funds are nothing but collective investment in number of companies in small lots. If some company makes a loss another may make profits thereby averaging out the returns for us.

Mutual Funds come in both debt and equity and in various combinations thereof. One can select a fund as per his risk appetite. Mutual Funds allows cumulative growth or annual payment of dividend if one so desires. Dividend again can be reinvested or payouts taken. The dividend option has again two components: long term capital appreciation which is retained and annual profits which are distributed. Mutual Funds allow partial redemption of units for greater flexibility.

My experience shows equity is the best friend anyone can hope for. DO NOT WASTE TIME. For more information on mutual funds see my write-up "The Real Money Plant".