The biggest objection we often come across from people who don’t want to invest in equities is that “There is risk in equity”.
There is no doubt that stock markets have an element of risk associated with them. But then so are many things in life, where we fail to understand the risk element.
Most consumer electronics goods like ovens, irons, vacuum cleaners etc. have a safety warning printed on them which cautions the users about the danger of improper usage resulting in fire, electric shocks and injury.
I am sure you have seen them too. Right? But that does not stop us from using these electronic items.
When I asked most of those people who tell me that stock markets are risky, about their preferred choice of investment, their answer would be \”Bank fixed deposits\”. One such investor who always vouched for the safety of bank fixed deposits is my neighbour Jayeshbhai, a senior citizen who retired from Indian Railways after four decades of service.
Despite being in his late 70\’s, Jayeshbhai is always full of life, cheerful and ready to crack some witty jokes. However last month, when I bumped into him in the building lobby, he was not his usual self. He looked tensed and was sweating profusely. Forget the jokes; he was not even looking at me.
I asked him if everything was fine. He nodded his head. I knew something was wrong but did not wish to bother him.
It was only a few days later that I came to know from our common friend that Jayeshbhai had deposited around 30 lakhs of his retirement money in a bank\’s fixed deposit that recently went kaput and was worried, about not being able to withdraw the money.
Just like Jayeshbhai, there are lakhs of investors whose hard-earned money is stuck with that bank, which has more than 137 branches across six states with deposits of around Rs. 11, 617 crores.
Timely intervention by RBI will ensure that things will improve for that particular bank in a few months. Only time will reveal whether this bank will be able to recover the money from the borrowers.
Now people who vouch for the safety of bank deposits might say that this is a one-off case. I want to tell you here that no, this is not a one-off case. Hundreds of co-operative banks have failed in the last two decades, taking investors for a ride. The single biggest reason for their collapse being, financial mismanagement.
What about deposit insurance for bank deposits under DICGC?
Before the PMC Bank saga, many depositors weren\’t even aware of the fact that bank deposits in all state, central and primary co-operative banks are insured up to a maximum of Rs. 100,000 for both principal and interest amount. This is irrespective of the total amount held by the investor in all accounts across all branches of the same bank.
For example, if a customer holds a total of Rs. 10,00,000 in two accounts in separate branches of the same bank, he will still get only Rs. 500,000 if the bank collapses.
So for all those who thought bank deposits are safe, it is time to think again.
Bank lockers aren’t safe either
We Indians love gold in any form, be it ornaments, coins or bullions and a majority of families have a substantial quantity of gold either inherited or purchased, which they keep in bank lockers for safety.
With CCTV coverage and round the clock security, people think bank lockers are very safe. However, there have been many cases of robbers breaking into bank lockers with one of the most sensational case being a robbery of cash and gold from lockers of Bank of Baroda\’s Jui Nagar branch in 2017, after tunnelling a hole through a shop next door.
Most people are not aware of the fact that their valuables are not safe, even in a bank locker. According to a statement released by RBI, banks have no liability for loss of valuables in lockers, and they are not liable to compensate the person holding the locker if the contents of the locker are stolen or damaged due to natural calamities.
Replying to an RTI query filed in 2017, RBI stated that the relationship between a bank and a customer who hires a bank locker was that of a landlord and tenant and the customer was solely responsible for the valuables kept in the locker.
So you see, bank deposits and bank lockers which are generally considered safe are not 100% secure. Every investment has its pros and cons, and hence a wise investor should always divide his investments among multiple investment options which should include both debt and equity.
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 create wealth by minimizing the risk in equity?
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
It is said that half-knowledge is dangerous. Lack of adequate knowledge and research is the reason why people lose money in stock markets. With proper research and patience, anybody can create wealth from equities. Know more.
This article was last updated on 26th Feb 2021
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